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Finance Teaching and Research after the Global Financial Crisis

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  • Varma, Jayanth R.

Abstract

Finance has come in for a great deal of criticism after the global financial crisis of 2007 and 2008. Clearly there were serious problems with finance as it was practiced in the years before the crisis. To the extent that this was only a gap between theory and practice, there is a need for finance practice to go back to its theoretical roots. But there is a need to re-examine finance theory itself. The paper begins with an analysis of what the crisis taught us about preferences, probabilities and prices, and then goes on to discuss the implications for the models that are used in modern finance. The paper concludes that the finance curriculum in a typical MBA programme has not kept pace with the developments in finance theories in the last decade or more. While a lot needs to change in finance teaching, finance theory also needs to change though to a lesser extent. Many ideas that are well understood within certain subfields in finance need to be better assimilated into mainstream models. For example, many concepts in market microstructure must become part of the core toolkit of finance. The paper also argues that finance theory needs to integrate insights from sociology, evolutionary biology, neurosciences, financial history and the multidisciplinary field of network theory. Above all, finance needs more sophisticated mathematical models and statistical tools.

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Paper provided by Indian Institute of Management Ahmedabad, Research and Publication Department in its series IIMA Working Papers with number WP2011-03-02.

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Handle: RePEc:iim:iimawp:9999

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  1. Didier SORNETTE, . "Dragon-Kings, Black Swans and the Prediction of Crises," Swiss Finance Institute Research Paper Series 09-36, Swiss Finance Institute.
  2. Gorton, Gary & Metrick, Andrew, 2012. "Securitized banking and the run on repo," Journal of Financial Economics, Elsevier, vol. 104(3), pages 425-451.
  3. David, Cesarini & Dawes, Christopher T. & Johannesson, Magnus & Lichtenstein, Paul & Wallace, Björn, 2007. "Genetic Variation in Preferences for Giving and Risk-Taking," Working Paper Series in Economics and Finance 679, Stockholm School of Economics, revised 12 Jan 2009.
  4. Carmen M. Reinhart & Kenneth S. Rogoff, 2009. "This Time Is Different: Eight Centuries of Financial Folly," Economics Books, Princeton University Press, edition 1, volume 1, number 8973.
  5. Markus K. Brunnermeier & Lasse Heje Pedersen, 2007. "Market Liquidity and Funding Liquidity," NBER Working Papers 12939, National Bureau of Economic Research, Inc.
  6. Viral V. Acharya & Lasse Heje Pedersen, 2004. "Asset Pricing with Liquidity Risk," NBER Working Papers 10814, National Bureau of Economic Research, Inc.
  7. B. Douglas Bernheim, 2009. "On the Potential of Neuroeconomics: A Critical (but Hopeful) Appraisal," American Economic Journal: Microeconomics, American Economic Association, vol. 1(2), pages 1-41, August.
  8. David Cesarini & Magnus Johannesson & Paul Lichtenstein & Örjan Sandewall & Björn Wallace, 2010. "Genetic Variation in Financial Decision-Making," Journal of Finance, American Finance Association, vol. 65(5), pages 1725-1754, October.
  9. Berg, Nathan & Gigerenzer, Gerd, 2010. "As-if behavioral economics: Neoclassical economics in disguise?," MPRA Paper 26586, University Library of Munich, Germany.
  10. Robert J. Barro & José F. Ursúa, 2009. "Stock-Market Crashes and Depressions," NBER Working Papers 14760, National Bureau of Economic Research, Inc.
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