Why aren't business school professors working on Wall Street?

<p>Probably a stupid question, but I'm just wondering-- Since they have more knowledge than anyone else, why can't they run companies or run their own hedge funds? Why do they instead choose to teach?</p>

<p>Skills required to be a good business school professor and skills required to be a good businessman are two different things. </p>

<p>Certainly am not saying that one can't do the other, and there are examples of those who have, but they are very different skill sets.</p>

<p>Many of them consult for WS firms. A couple professors of mine have written research that is used on trading desks, etc. The people who become professors tend to enjoy freedom and research. Also, there is a certain level of respect and importance attributed to academics.</p>

<p>
[quote]
Probably a stupid question, but I'm just wondering-- Since they have more knowledge than anyone else, why can't they run companies or run their own hedge funds? Why do they instead choose to teach?

[/quote]
</p>

<p>Let me stop you right there and say that, frankly, they often times don't have more knowledge than anybody else and hence can't competently run their own company or hedge fund. To paraphrase the old Woody Allen joke, those who can't do, teach. (And those who can't teach will teach gym, and those who can't even teach gym apparently were all assigned to teach at my school.) </p>

<p>I could write reams about this particular issue, and I have. But perhaps it's better to simply consider some of the more introspective works within management academia that lament the current state of the discipline:</p>

<p>
[quote]
...Just look at the hiring and tenure processes. Deans may
say they want practitioner-oriented research, but their
schools reward scientific research designed to please academics.
By recruiting and promoting those who publish
in discipline-based journals, business schools are creating faculties filled with individuals whose main professional aspiration is a career devoted to science. Today it is possible to find tenured professors of management who have
never set foot inside a real business, except as customers.
</p>

<p>At many schools, the road to tenure does not run
through field work in businesses. Among young academics and their advisers, this understanding is explicit. Junior scholars are urged to avoid too much work with practitioners and to concentrate their research on narrow, scientific
subjects, at least until late in their quest for tenure.
(While many conscientious researchers take it upon themselves to learn about the practice of business after they are tenured, there are few incentives for them to do so.)...</p>

<p>Businesspeople are starting to sense that individuals
in the academy are not engaged in the same profession they practice. Employers are noticing that freshly minted MBAs, even those from the best schools- in some cases, especially those from the best schools - lack skills their organizations need. At first, employers were confused about the source of this problem, but they seem to be realizing
that the people who taught their new hires had
spent little time in organizations as managers or consultants and that younger faculty members may not even know many businesspeople. Today, business practitioners are discovering that B school professors know more about academic publishing than about the problems of the
workplace.

[/quote]
- Bennis & O'Toole, 2005, How Business Schools Lost Their Way, Harvard Business Review</p>

<p>
[quote]
Rigby's data suggest that less than one third of the tools and ideas that companies are paying money to implement came out of academia and those that originated in universities were used less often and were abandoned more often.</p>

<p>Considering the evidence, the data suggest that the research done in business schools is making a modest contribution to management practice and management thought, even when compared to research produced by nonacademics such as journalists, consultants, and people working in companies.</p>

<p>...Why has there been such a modest effect of business school scholarship on practice, in spite of the tremendous expenditure of resources by intelligent and motivated people? One possible answer comes from a reflective essay by Paul Lawrence. Lawrence argued that "the better work in our field has come from problem-oriented research rather than from theory-oriented research," (1992: 140) but that many institutional pressures conspired to ensure that there was not very much problem-oriented research being done. Sutton and Staw questioned whether theory in the organizational sciences was useful and wrote that "the field first needs more descriptive narratives about organizational life" (1995: 378). Pfeffer (1997), in a similar vein, argued that research should be anchored in important phenomena. So, perhaps the emphasis on theory rather than observation, problems, or phenomena explains part of the problem.</p>

<p>...Although one may quarrel with the prescriptive wisdom of these various insights, there is little doubt that the arguments help us understand something about why research efforts in business schools do not invariably produce the impact one might like, given both the talent and resources expended.

[/quote]
- Pfeffer & Fong, 2002, The End of Business Schools?
Less Success Than Meets the Eye, Academy of Management Learning & Education</p>

<p>
[quote]
a large part of our difficulty stems
from the education of the young people we invite to join our faculties. Simply stated, for the most part, they are educated in a discipline—usually psychology or sociology.</p>

<p>Before they have stepped into our classrooms or
started a research project, they have been inoculated with the methods and values of their discipline and the type of research I am calling for is not something they have been
educated to value, understand, or, for the most part, are capable of doing.</p>

<p>Although I am not intimately familiar with how these
disciplines actually make appointments decisions, I have a strong suspicion that what business schools have done is to actually adopt a caricature of what goes on in these disciplinary
departments. Allow me to illustrate why I reach
this conclusion by describing a recent meeting I attended with my tenured colleagues to discuss possible candidates for promotion. As we discussed the accomplishments of these young people, the conversation quickly focused on their publication record. How many articles had they published in refereed journals? But then it got more specific;
how many articles had each published in “A” tier,
“B” tier, and “C” tier journals? After this discussion had continued for perhaps an hour, I realized I was out-of-date. I didn’t know what this alphabet soup meant, so I asked.</p>

<p>My colleagues informed me that the ranking of the journals was based on how many times each journal’s articles were cited elsewhere. Somehow, this seemed like a curious and circular criterion to use.</p>

<p>Furthermore, as I thought about it later, I realized that nobody had mentioned anything about the importance of the work to understanding organizations, or its relevance
to issues of practice
</p>

<p>Although I have obviously never been on a medical
school faculty, I cannot imagine that such criteria are
used for considering the promotion of young scientists. Clearly attention must be given to the person’s contribution to knowledge and/or the relevance of the work to improving the practice of medicine. So it should also be with business school promotions! I realize that promotion
reviews do entail requests for assessments of the
importance of the work in question. Yet I wonder how many of these evaluations consider the practical merits of the work, or in fact, whether it is focused on theoretical issues, which will lead to improved practice. I may be
too harsh or cynical, but I have read many such letters, and I find the emphasis on the design, methodology, and the quality of the reasoning, and there is no mention of practical importance.</p>

<p>...I do not think it is an exaggeration
to argue that the expectations for more “scientific”
research have overwhelmed the strategies of individual schools. Nowhere is this clearer than at HBS. **During the past decades, there has been an erosion of our faculty’s belief in the sanctity of relevance, **which I think one can only attribute to an influx of discipline-educated faculty and to the shift in the belief system of the broader business
academy, as well as the social sciences more
broadly. The power of the broader norms of our field is immense. These expectations determine the way scholars, young and old, think about what their peers value and what is necessary for career success, and therefore what type of research they should undertake.</p>

<p>There also is a great deal of career mobility among us. Thus, what happens at one institution has consequences for all of the others. One of the major reasons young colleagues at HBS give for not undertaking relevant research is the fear that it will not be valued at other schools if they want to move to one of them.

[/quote]
- Lorsch, 2009, Regaining Lost Relevance, Journal of Management Inquiry</p>

<p>
[quote]
"...many of the discipline-trained scholars joining business-school faculties were not intrinsically interested in business. One result was that, unlike earlier generations of business school professors, few younger faculty members now had regular contact with practicing managers outside of executive education classes. Few were motivated in their research by a desire to examine the real problems that managers faced. Instead, to the extent that business school faculty were problem-driven, it was increasingly with respect to the theoretical and conceptual problems of the disciplines in which they were trained....</p>

<p>...With business school faculties having little experience or understanding of business, business schools themselves seemed in obvious danger of forgetting their ostensible purpose. The goal of producing deep knowledge about organizations for improving managerial practice was displaced as a greater proportion of business school faculty saw other academics, rather than practicing managers, as their constituency. </p>

<p>...Anyone who spends time in an elite business school today knows that it is a place riddled with contradictions. Faculty are hired and promoted on the basis of discipline-oriented research that, as critics such a Warren Bennis and James O'Toole have noted of late, often has little or no bearing on the practice of management. Inside the classroom, as Henry Mintzberg has observed, faculty and their students have little in common in terms of shared experience and interests; in contrast to such milieus as law and medical schools, many business school faculty members no longer identify with their MBA students, and not surprisingly, their students no longer identify with them..."

[/quote]
</p>

<p>-Khurana, 2007, From Higher Aims to Hired Hands, p.311-312, p. 369.</p>

<p>
[quote]
To fix business schools, we academics should focus less on our reputations among our peers, and more on the connection between our research and real managers in real businesses.</p>

<p>One consequence of the quest for academic legitimacy amidst business school faculty is what one observer called a "relentless quest for status." Academics in all fields gain status by publishing articles in peer-reviewed scholarly journals, particularly the top four or five outlets in the field that really count. Status also stems from those self-same articles being cited in other articles, to show 'impact' or 'influence' on other academics.</p>

<p>in my own field of management, status comes from being recognized as a contributor to a base discipline, such as sociology, economics, or psychology. It's not about making a contribution to management thinking, with its unique emphasis on the jobs of - you guessed it - real managers.

[/quote]
- McGrath, 2009, Academics: Get Real!, Harvard Business Review Blog Network</p>

<p>To be clear, these are not the words of a bunch of fringe players in the business academic landscape. Jay Lorsch and Rakesh Khurana are widely cited professors at Harvard Business School, Jeff Pfeffer is arguably the most well-cited professor at Stanford GSB, Rita Grath is a major player at Columbia GSB, and Warren Bennis is University Professor and Distinguished Professor at USC Marshall and former chair of the Organizational Studies department at the MIT Sloan School of Management. Yet they're publicly lamenting the state of management academia, and in particular, how many business school professors, frankly, know little about business, and don't really care to know. </p>

<p>
[quote]
Many of them consult for WS firms.

[/quote]
</p>

<p>And I suspect that much of that is ceremonial or ornamental in nature, along the same logic as to why many companies hire consulting firms - to, frankly, be able to justify a controversial step that the management already has decided to do anyway. {I want to sell some large core of the company, but how do I justify that to my board: well, maybe if I can hire McKinsey or a HBS professor who will then advise me to do what I had already decided anyway, then I can push my strategy forward wielding the provided political deflector shield such that I can then conveniently blame them if things go sour, as the strategy supposedly wasn't really "my" idea anyway. </p>

<p>But I suppose that's better than the finance research that was heavily utilized and, frankly, either contributed heavily to the crash, or at best, did nothing to prevent it. In the run-up to 2008, I don't believe there was even a single article in the Journal of Finance, the Journal of Financial Economics, or the Journal of Accounting Research (which are by far the 3 leading finance/accounting journals in the world) that warned that the most catastrophic balance sheet/solvency crisis since the Great Depression was about to devastate the world's banking system. Not even one. * There have been a number of such papers appearing in those journals *now. But, let's face it, that's not very helpful. Where were all of those finance/accounting professors when we really needed them?</p>

<p>What's the point of an MBA if the professors are too incompetent to work in the real world, then? Thanks for the detailed response.</p>

<p>
[quote]
What's the point of an MBA if the professors are too incompetent to work in the real world, then? Thanks for the detailed response.

[/quote]
</p>

<p>Yes, many people within management academia have been (quietly) asking that very same question. </p>

<p>But, in perhaps a bizarre defense of the MBA, the point of the degree is not really to learn from professors, but rather to obtain access to the bevy of exclusive recruiting and networking resources at those schools. The truth is, many (probably most) MBA students are not really interested in the academic side of the program anyway, because that's one of the few ways to obtain access to desirable jobs such as the elite consulting and financial services firms that most MBA students at the top programs crave. (For example, HBS, for all of its vaunted 'General Management' expertise, sends only a tiny percentage of students to general management positions, but rather send the overwhelming majority to service positions such as consulting or finance). Similarly, those firms continue to recruit at the top MBA programs because that's where they can find the students who want those jobs. </p>

<p>In other words, we have a version of the prisoner's dilemma combined with network effects. Students continue to come because the recruiters are there, the recruiters continue to come because the students are there, and those self-reinforcing network effects ensure that MBA programs continue to serve as a desirable recruiting ground. Maybe students & recruiters would be better served if they could all coordinate and agree to meet elsewhere, but they can't. Students don't dare to defect because they don't think the recruiters will follow, and similarly, recruiters won't dare to defect because they don't think the students will follow. And besides, even if they did defect, the next question would be where would they defect to? MBA programs may be a deeply inefficient recruiting aggregator, but they're the only game in town. {To be fair, some consulting and finance firms are recruiting at other graduate programs such as name-brand PhD or law degree programs, but if anything, those programs are an even less efficient recruiting aggregator for those jobs. After all, at least the MBA programs have something to do with business. Those other programs have nothing to do with business.}</p>

<p>And also, in fairness, it probably should be said that MBA programs, for all of their recruitment/career-placement inefficiency, are surely no worse than undergraduate programs are. Let's be perfectly honest - the vast majority of undergrads will not pursue their undergraduate major professionally for more than a few years after graduation. Most sociology majors do not become professional sociologists. Most poli-sci majors do not become professional political scientists. Most history majors do not become professional historians. Most English majors do not become professional literary critics or writers. </p>

<p>So why spend 4 years majoring in those topics at all? Specifically, why go to Harvard College to major in English if you're not actually going to become a professional literary critic? The core reason is simply to obtain a degree from Harvard and therefore enjoy the leverage of the best branded university in the world along with access to the accompanying extensive recruiting and alumni networking resources of a Harvard bachelor's degree. Similarly, the reason to attend Harvard Business School (or other top B-school) is not really to gain access to professors who are deeply knowledgeable about real-world management - for they are not, as HBS Professors Rakesh Khurana and Jay Lorsch would readily agree (and I suspect that Clay Christensen, Paul Lawrence, Howard Stevenson, and many others would also concede) - but simply to gain access to the HBS brand and the accompanying recruiting and networking. </p>

<p>But of course as long as that persists, then business schools will continue to have no incentive to actually hire faculty with skills in real-world management as opposed to the academic publishing game. And even those rare faculty who may enter B-schools with useful management knowledge will not be incentivized to develop it further, but instead will be required to develop academic publishing skills (or else be terminated for failing their tenure reviews). </p>

<p>As a case in point, I know one guy who just got placed as an assistant professor at a top 25 B-school. He freely admits that he doesn't have any truly marketable business skills, having entered the PhD program directly from undergrad, and never holding a full-time job in any capacity (other than summer internships) for even a single day in his life. Heck, he'll be younger and far less experienced than the vast majority of the MBA students he will be teaching. (Most MBA students will have at least 2-4 years of work experience, whereas he will have precisely zero). </p>

<p>He's also self-aware enough to find the situation ridiculous, as he doesn't honestly think he's legitimately qualified to teach business. But it's not his fault. The business school offered him a tenure-track job, with a salary well into the six figures, and where he only has to teach one semester in the entire year, thereby leaving him 8 full months (the other semester + the summer) every year to devote to research that he enjoys. A business school gives him that kind of offer, he's obviously not going to turn it down, even if he doesn't honestly think he's qualified. {After all, it's not his fault that they gave him the offer.} </p>

<p>It is for that reason that I think that, frankly, far more people pursuing academic careers should do so within business schools. You will be paid extremely well for an academic, as that guy I discussed is being paid far more as a starting assistant business professor than most tenured faculty at the same university in the other disciplines. You often times don't have to teach very much, at least at the top B-schools - I've heard one person receive an offer from the Yale School of Management where they would have no teaching responsibilities until several years after they had already joined, and hence could spend all of their time just doing research. And the kicker is - you don't really need to know much about real-world management. {Granted, you do need to know about publishing in academic management journals, but as people like Bennis, Lorsch, Khurana, and McGrath have pointed out, that has almost nothing to do with real-world management.}</p>

<p>I don't know about the program or professors you have dealt with, but I know 6 professors who I am personally close with who consult and have their research used on the street. Maybe management is different, but finance and econ is very math heavy and research professors are doing is used at hedge funds and banks. The level of expertise and dedication to research makes a PhD very valuable.</p>

<p>Because they teach ethics in academics</p>

<p>
[quote]
Maybe management is different, but finance and econ is very math heavy and research professors are doing is used at hedge funds and banks. The level of expertise and dedication to research makes a PhD very valuable.

[/quote]
</p>

<p>Um, just because a discipline is math-intensive and that the research is being used doesn't make it useful and certainly not predictive. (After all, much of the strategy literature is just as mathematical,being based on advanced game theory, but practically every strategy researcher would concede that little of it has proven to be useful). I keep returning to the same question regarding the finance/econ/accounting academic community - why were none of them able to predict the crash, the most calamitous financial solvency crisis since the Depression? If the research was so useful, why was there not even a single paper published in the JoF, JFE, or JAR leading up to 2008 filled with dire warnings that the system was about to fall into the abyss? Instead, in the months leading up to the collapse of the system, the JoF was publishing such articles as the impact of venture capital on strategic alliances and market underreactions to changes in dividend policy. Frankly, who the heck cares about that, when the entire financial system is just about the be thrown into turmoil, necessitating unprecedented taxpayer intervention that persists to this day (exhibit #1- Greece, and the European banks who hold Greek sovereign debt)? Like I said, not even a single article in the lead-up to the crash was warning that it was about to occur. The rare few academics such a Noriel Roubini who were loudly warning about the upcoming crash were not actively conducting research - Roubini hadn't published in a top journal in years - which speaks further to the futility of the research. There are plenty of finance papers now being published about the crash, but that's not very useful. Where were all these articles before the crash? It's conveniently easy to "predict" the crash once you've already seen it. </p>

<p>All the more stunning and saddening is that not only did the finance/accounting community fail to predict that the system was about to crash, they also can't agree on how to mend the system after the crash. Take even a simple question as whether the US government should have passed the financial stimulus bill. Some Nobel Prize-caliber economists such as Paul Krugman and Joseph Stiglitz have stated that we absolutely should have and indeed that, the stimulus should have been even bigger. Others such as Robert Barro have said that we absolutely should not have. That embodies the old joke regarding the "Law of Conservation of Economics": Whenever you have one economist endorsing one policy, you must have another economist somewhere else who is endorsing exactly the opposite policy. This state of affairs is simply embarrassing, as Brad Delong has himself freely conceded:</p>

<p>when you have Nobel Memorial Prize-caliber economists like Arizona State's Edward Prescott, Chicago's Robert Lucas and Eugene Fama, and Harvard's Robert Barro claiming that there are valid theoretical arguments proving that fiscal stimulus simply cannot work, not even in a deep depression--even though they cannot enunciate such theoretical arguments coherently--it is entirely fair for outsiders to conclude that academic economics as a profession is useless...</p>

<p>But</a> the Economics Profession Right Now <em>Is</em> Useless...</p>

<p>For those who continue to disagree regarding the usefulness of mathematics within economics and finance, then I have a simple question for you: name a sequence of successful real-world predictions that mathematical finance and economics has provided. Not after-the-fact justifications or explanations but a sequence of actual successful predictions. The reason why high-powered mathematics is used in physics is because mathematical physics has proved to be a highly successful predictive tool. Newtonian mechanics work, Maxwell's equations of electromagnetism work, the Schrodinger equation of quantum physics works, the theory of relativity works in the sense that they produce numerical predictions with tight confidence intervals - with such technologies as the computer, laser, airplanes, electric power, GPS systems being living proof that those theories work. I turn on my computer, it works, I load Windows, it works, I open my browser, it works, I point to collegeconfidential.com, it works. The behavior of billions upon billions of electrons have to be coordinated and predicted for all of that to work - and they do. Does mathematical economics have the capacity to make the same sort of tight numerical predictions? </p>

<p>The only branch of economics that seems to have developed a set of reliable predictions is behavioral economics. Perhaps not coincidentally, behavioral economics is arguably the least mathematical of all of the economics subdisciplines and is largely a melding of economics with psychology, with heavy reliance upon experiments as opposed to mathematical derivations as its core epistemological basis. </p>

<p>
[quote]
I am personally close with who consult and have their research used on the street.

[/quote]
</p>

<p>Again, I have to draw the distinction between research being used and research being useful. The fact of the matter is, there is snake-oil aplenty being peddling in the business world. Jim Collins, a former Stanford GSB faculty member, has sold millions of copies of popular press management books telling companies how they can become 'Good to Great' or 'Built to Last', but that hardly makes his research 'useful' (and indeed, later research bears out the notion that many of Collins's companies that supposedly became 'good to great' or 'built to last' later became mediocre). </p>

<p>So I return back to the basic point: if the 'used' finance research was truly so 'useful', then it should be elementary to point to the specific finance articles that were used and demonstrate how they advised investors to short the financial markets in 2008 and thereby generate billions upon billions of easy profits. Furthermore, those finance professors who wrote those articles should now be academic superstars as being the only ones who published clear and actionable predictions that a calamity was about to occur. So, exactly who are these professors, and exactly what are these supposedly useful research articles?</p>

<p>Dude, your opinion is yours and that is cool, but when friends of mine who are working on desks at BB's and are being handed academic papers to study, papers written by friends of mine, I respectfully say you are wrong. My other professor consults for Goldman Sachs and teaches. Another professor works with F500 companies in their marketing and management area.</p>

<p>CAPM, Black Scholes, French Fama, etc are all academic based and well known and used in the industry. I used academic based theory, tweaked for our specific uses in my job also. </p>

<p>Why you are writing a short paper on this is beyond me. Enough professors work on Wall Street and in other areas of business to show that you clearly are not right. Now if you are arguing whether they are effective, that is another thing and entirely subjective and I still disagree.</p>

<p>
[quote]
Why you are writing a short paper on this is beyond me. Enough professors work on Wall Street and in other areas of business to show that you clearly are not right.

[/quote]
</p>

<p>How am I 'clearly not right'? The question that the OP asked was why don't business school professors run their own companies or own hedge funds. I would contend that it is because the vast majority of them would not be successful in doing so, because most management research is, frankly, ineffective and irrelevant. And, again, it's not just me saying so, but many (probably most) business school professors themselves who have conceded that their research lacks relevance. </p>

<p>
[quote]
My other professor consults for Goldman Sachs and teaches. Another professor works with F500 companies in their marketing and management area.

[/quote]
</p>

<p>
[quote]
CAPM, Black Scholes, French Fama, etc are all academic based and well known and used in the industry. I used academic based theory, tweaked for our specific uses in my job also.

[/quote]
</p>

<p>Again, you've confused the issue about research being used as opposed to being useful. I agree that many finance theories are indeed used and well-known on Wall Street - but are they useful? I continue to ask the fundamental question: if finance academic theory was truly so useful, then why didn't the finance academic community predict the crash? </p>

<p>To be fair to the finance community, many of them have recently conceded the point that their research was amiss and they missed a key phenomenon within the world's financial system. in fact, much introspection has been published of late within the finance literature bereaving how ineffective their real-world predictions actually are. One only has to read some the more recent self-critical commentaries published in the finance literature. To that, I would say, good for them. The first step in solving any problem is recognizing that a problem exists. </p>

<p>But my question to you then is: if even the finance academic community now freely concedes that it is unable to produce reliable predictions, why do you continue to insist that they can? Are you saying that you know more about their own capabilities than they know about themselves? </p>

<p>Now, let's take your specific points in turn:</p>

<p>CAPM: The basic epistemological problem with the CAPM model is that it is fundamentally empirically untestable and therefore unfalsifiable. The CAPM assumes that the market portfolio return can be measured, but the CAPM market portfolio does not consist of just the return of an index fund or a basket of other liquid investments (which is what is often times used in real-world financial models), but rather is the market portfolio of *all potential investments in the world. And that truly means all investments, including not only publicly traded equities and debt instruments, but also private equity, jewelry, all works of art (including works that never trade such as the Mona Lisa), human/social capital, private firm project investments, all of the world's real estate (including real estate that never trades such as the White House or Buckingham Palace), and every single other potential financial investment in the world. That is the true "market" portfolio according to CAPM, yet that portfolio is unobservable which therefore means that CAPM is not an empirically testable concept. This is the crux of the infamous Roll's Critique. </p>

<p>Black Scholes: Again, another fundamentally empirically unfalsifiable concept. Black-Scholes denotes what options prices *ought to be in a perfectly rational world with the assumptions met (negligible transaction costs or arbitrage opportunities, transactors can freely borrow and lend at the risk-free rate and buy/sell fractional stock quantities, the price of the stock follows an exponential Brownian motion random drift). But it says little about what real-world options prices actually are, and indeed, real-world prices exhibit important deviations such as the 'volatility smile'. </p>

<p>And besides, if you want to talk about Black-Scholes, need I mention the debacle of Long Term Capital Management that necessitated a Federal government coordinated bailout? </p>

<p>*Fama & French: By this, I assume that you mean the Efficient Market Hypothesis (EMH), as while Fama & French wrote other papers, the EMH is by far their most famous of them. The problem with EMH is that it is hotly empirically disputed, particularly by the behavioral economics who have documented an extensive bevy of inefficient market behaviors. If EMH was really such a useful model, then one would think that there would be greater consensus on its predictive ability. {More importantly, it would, frankly, call the more profitable activities of the financial services sector into great question, as the implications of EMH is that investors should invest in low-cost index funds or ETF's rather than high-expense alternative services such as private equity, hedge funds, private wealth management, and the like.} </p>

<p>I continue to return to the basic point: if finance academic theory was truly so empirically successful, then you would expect that they would have been able to predict the crash. Where were they when we needed them? Sure, there are plenty of finance papers now being published that discuss the crash in depth. But where were they before the crash? </p>

<p>MSFHQsite, frankly, I'm a bit surprised by the stance you're taking. The world is suffering through the most traumatic financial catastrophe in over 75 years, where major financial firms that have been using academic financial models have proven time and time again to have made horrendous decisions that have sundered their investors, have plunged governments into a wall of debt, and will surely result in multiple governments having to default and may even result in the euro currency union having to be dissolved, along with the immiseration of millions of people in the world who have lost their jobs, their homes, their 401k's. And you're really going to defend the efficacy of academic finance? If so, well, all I can say is that you're a truly brave man.</p>

<p>I knew of two, that tried to start businesses and it didn't work out for them, so they turned to teaching. My law teacher had his own practice.</p>

<p>
[quote]
I knew of two, that tried to start businesses and it didn't work out for them, so they turned to teaching.

[/quote]
</p>

<p>To reiterate the old Woody Allen joke: Those who can't do, teach. Those who can't teach, teach gym. And those who can't even teach gym apparently were all assigned to teach at my school.</p>

<p>Dude, you have something against professors. Running a business and dedicating your life to research are two different things. I think you discount the effort it takes to get a PhD. </p>

<p>Most people cannot run their own business. Some prefer the security of a paycheck. Some aren't good business people. Lawyers cannot always run their own practice, that doesn't make them failures. </p>

<p>You are wrong dude. Sorry. No need to write a book. Most of the professors at all the top business schools consult or work in finance on the side. They are highly paid and help the financial community stay at the top of their game. Just because they didn't predict the housing crisis doesn't mean they are always wrong or worthless.</p>

<p>The world is suffering from over leverage. Financial models didn't cause this. The housing market overheated because of low standards and cheap capital. I am not going to get into a long argument over the root causes of this economy, but it isn't professors being incompetent.</p>

<p>
[quote]
Running a business and dedicating your life to research are two different things. I think you discount the effort it takes to get a PhD.

[/quote]
</p>

<p>I'm not sure you really mean what you say, but trust me, I don't discount the difficulty of obtaining a PhD, and I certainly don't discount the difficulty of placing at a top business school and then obtaining tenure in the least. Nor do I discount the difficulty of publishing in a top management journal. </p>

<p>My question is whether doing so is useful. Just because something is difficult doesn't mean that it is useful. Memorizing the digits of pi to a thousand places is certainly very difficult, but that doesn't mean that it is useful. </p>

<p>
[quote]
Most people cannot run their own business. Some prefer the security of a paycheck. Some aren't good business people. Lawyers cannot always run their own practice, that doesn't make them failures.

[/quote]
</p>

<p>But it does raise the question of why business school professors are teaching other aspiring businessmen if, as you say, they are unable to run a business themselves. After all, we are talking about business schools are we not? At least, I was. Your analogy regarding law professors is not apropos, because law schools are not reportedly teaching students who to run their own law practices, but simply how to practice law, and law is practiced within a wide variety of settings (i.e. by the government, by NGO's, etc.) But business schools are supposedly designed to teach people about business. That's why they're called business schools. </p>

<p>Look, you might have a legitimate point if all finance professors were working in the pure liberal arts departments such as economics or mathematics. If that were the case, then fair enough - they're not teaching business, they're not (implicitly) claiming to be experts in business, MBA students aren't putting their careers on hold in order to learn from these supposed experts in business, and more importantly, they're not earning the doubled or tripled salaries for working as business school academics as opposed to pure economists or pure mathematicians. {That is no exaggeration - a newly hired assistant professor in finance at a top business school may earn triple that of a newly hired assistant professor in mathematics at the same university} </p>

<p>The main problem is that they are at a business school which means that they ought to be experts in business. If they're actually not, then why are they there? </p>

<p>
[quote]
You are wrong dude. Sorry. No need to write a book. Most of the professors at all the top business schools consult or work in finance on the side. They are highly paid and help the financial community stay at the top of their game. Just because they didn't predict the housing crisis doesn't mean they are always wrong or worthless.

[/quote]
</p>

<p>I'm sorry, but you are the one who is wrong. But more importantly, finance professors were wrong and worthless, and to their credit many (almost certain most) of them have introspectively conceded the fact that most of the published finance and accounting literature in the last few decades has proven not to be useful (which then raises the question of why have professors running themselves ragged trying to publish it). </p>

<p>I would think that the housing crisis would be overwhelming prime-facie evidence that they were clearly wrong and quite worthless. After all, this was no mere minor event but the most catastrophic financial event of the last 75 years - one that is destined to change the face of the finance industry forever. If you can't predict even a game-changing event like that, then what good are your predictions? But the evidence doesn't rest solely with the current crash. Was academic finance able to predict the Asian Financial Crisis of 1997? How about the Scandinavian banking crisis of the early 1990's? How about the US Savings & Loan Crisis? How about the Latin American sovereign debt crisis of the 1980's? Exactly which financial crises has the financial literature been able to predict? Have there been any? </p>

<p>Personally, what I think would help - and a growing number of finance academics seem to agree - is that finance journals should convert from providing retrospective to prospective analyses - that is, rather than merely attempting to build mathematical models to retroactively explain past events (which, as mathematicians know all too well, is always possible to do given sufficient degrees of freedom), but rather would require submitters to make predictions which would then later be checked upon future data. Only those finance professors who actually made a successful prediction would then be credited with a publication towards placement and tenure. </p>

<p>But we don't have such a publication system right now, which means that hundreds of finance professors have been placed and tenured without ever having made even a single successful prediction in their entire careers. </p>

<p>
[quote]
Most of the professors at all the top business schools consult or work in finance on the side.

[/quote]
</p>

<p>I think you mean to say that all of the professors of finance at the top business schools consulting or work in finance on the side. The vast majority of business school professors are not finance professors. </p>

<p>But to your specific point, like I said, you continue to confuse something that is "used" vs. something that is "useful". Just because something is used doesn't mean that it is useful. The medical community once "used" the theory of the four bodily humors to attempt to combat maladies. The wares of snake oil salesman and medical quacks that were ineffective and often times downright dangerous such as radioactive and cocaine-infused drinks were widely used. Just because something is widely used doesn't mean that it is useful. </p>

<p>
[quote]
They are highly paid

[/quote]
</p>

<p>Again, the question is not whether they are highly paid, but rather whether they are useful.</p>

<p>For one possible reason why business professors may be highly paid but not useful, I think everybody should see the movie 'Inside Job', the current Academy Award winner for Best Documentary, and the first documentary to my knowledge that
truly challenged the propriety of the academic community. Many finance professors probably have been corrupted, or at least, coaxed into not publishing results that banks would find embarrassing. </p>

<p>
[quote]
and help the financial community stay at the top of their game.

[/quote]
</p>

<p>The finance community has stayed at the top of its game? Really? Are you sure? Can I quote you on that one? </p>

<p>What exactly happened to Lehman Brothers? Bear Stearns? Washington Mutual? Wachovia? Fannie Mae and Freddie Mac? AIG (which wasn't even a bank)? RBS? Northern Rock? Lloyds Banking Group? Anglo Irish Bank/Allied Irish Bank/ Bank of Ireland? Landsbanki/Kaupthing/Glitnir? The Spanish cajas and the German Landesbanks? Heck, what happened just this week with Societe General, BNP Paribas, and Credit Agricole? </p>

<p>So is this really the finance system 'at the top of its game'? Perhaps you might want to revise that statement. Most of the above institutions that I named made extensive use of the academic literature, and look where it got them. </p>

<p>
[quote]
The world is suffering from over leverage. Financial models didn't cause this. The housing market overheated because of low standards and cheap capital. I am not going to get into a long argument over the root causes of this economy, but it isn't professors being incompetent.

[/quote]
</p>

<p>Even if you want to say that the academics didn't cause the problems, they certainly didn't help. If the world was suffering from overleverage, low standards, and cheap capital, then why wasn't the finance literature rife with articles stating exactly that? Why didn't the finance community converge upon a professional opinion, as gleaned from the literature, that the world was overleveraged and ought to take remedial steps? If they had done that, and the banks and regulators ignored them, then fair enough, then they would simply be modern-day Cassandras and could legitimately wash their hands of today's mess. They warned the world, and it would not be their fault if the world didn't listen. </p>

<p>But that's not what happened. Other than a few outliers such as Noriel Roubini and Robert Shiller, practically nobody in finance academia was predicting the crash. Probably not coincidentally, neither Roubini nor Shiller has published anything in a top academic journal in years. {The luxury of having tenure is that you no longer need to publish in top journals.} </p>

<p>But on the other hand, I never said that finance professors at top B-schools were 'incompetent', strictly defined. Finance professors are indeed highly competent at publishing within the finance literature and advancing their careers. The problem is not with the professors, but rather with the academic system, which provides absolutely zero incentives for correct predictions. You can publish models in 10 papers in the Journal of Finance - with every model being diametrically refuted with future data - and it doesn't matter. You will still be able to count 10 "successful" publications on your CV for your tenure review. Academia has evolved into a system where you can be proven to be predictively wrong over and over again, and it doesn't matter, because publications are based merely on the analysis of past data, not on predicting future data. {Or, even worse, many published models such as CAPM are inherently empirically untestable and so nobody will ever know whether it is false.} </p>

<p>So to reiterate, I am not trying to pick on individual finance professors. The problem is with the system. Professors are not really incompetent, but rather it is the system that is incompetent. </p>

<p>Again, if you choose to disagree, then I would ask, how many financial crashes has the academic system been able to clearly predict, that is to say, if I had read all of the articles in the top finance journals published in the months preceding a crash, I would have obtained a clear sense of foreboding that something disastrous was about to occur? Can anybody name even one such instance? </p>

<p>** So here's the "Sakky Challenge": name me a single financial crash that the finance literature clearly predicted in the months prior to its occurrence**</p>

<p>You know the old saying:</p>

<p>Those that can't DO,</p>

<p>TEACH.</p>

<p>Those who can't do, teach. Those who can't teach, teach gym. And those who can't even teach gym apparently were all assigned to teach at my high school.</p>

<p>You can believe whatever you want, but business professors DO have successful "real world" careers, they DO create research and theory that is used to make money and they are very important in their field.</p>

<p>Do you even work in business or finance? I am having a hard time believing you work anywhere near the field since you keep leaning on the fact that academia is a failure for not predicting the housing crisis. I didn't realize that PhD's were supposed to be oracles who could see the future. </p>

<p>Get real. I just told you that professors of mine, friends of mine, consult, have their research used and are very influential in their field. I don't think Goldman would be paying what they are paying to my friend if he did not add value. I don't think UBS would be having traders read another professor's research if it didn't explain something or show them a way to execute their trading systems. </p>

<p>Also, grow up. Only time I have ever heard that "those who can do, those who can't teach" crap is from high school students. Maybe undergrads have that opinion also since what they are learning is just the basics, but when you start taking graduate level classes and really start delving into the research that professors are doing, your opinion changes.</p>

<p>
[quote]
You can believe whatever you want, but business professors DO have successful "real world" careers, they DO create research and theory that is used to make money and they are very important in their field.

[/quote]
</p>

<p>The question is not whether they are important in their own field - academia being a highly insular community - or whether they make money for themselves. The question is whether they make money for their clients along with the concomitant question of whether they could have successful real world careers. See below. </p>

<p>
[quote]
Do you even work in business or finance?

[/quote]
</p>

<p>I'm quite certain that my knowledge about business is far better than yours. </p>

<p>
[quote]
[I am having a hard time believing you work anywhere near the field

[/quote]
</p>

<p>Actually, I'm frankly, having a very hard time believing that you work anywhere in the field, given the examples that you cite and that you clearly know little about the details of finance. Otherwise, I don't think you would have been citing, say, CAPM as an example of an empirically success theory, because those who actually know finance research understand all too well that CAPM is unfalsifiable. </p>

<p>
[quote]
since you keep leaning on the fact that academia is a failure for not predicting the housing crisis.

[/quote]
</p>

<p>Not just the housing crisis - like I said, name one financial crisis that the finance literature successfully predicted. Win the Sakky Challenge: can you even name one? </p>

<p>
[quote]
I didn't realize that PhD's were supposed to be oracles who could see the future.

[/quote]
</p>

<p>Oh? They're not? Isn't that what useful research is supposed to be about - that it actually allows you to predict what something is going to do? As a case in point, engineering research actually predicts that a computer or machine will actually work...and it does. Physics research will predict that a particle will move in a certain direction in response to certain forces, and it does. Is it really then so outrageous to expect finance research to actually predict the behavior of financial systems? If not, then what exactly is the point of finance research? </p>

<p>
[quote]
Get real. I just told you that professors of mine, friends of mine, consult, have their research used and are very influential in their field. I don't think Goldman would be paying what they are paying to my friend if he did not add value.

[/quote]
</p>

<p>Get real. Companies do stupid things all the time - the financial crisis being vivid proof of exactly that. I'm sure that all banks - Goldman included - would like to redo many of the investment choices that they made throughout the last decade. Many (probably most) activities that the banks engaged in during that decade proved not to be value-added activities. As a clear example of what I'm talking about, Goldman's stock price is at the same level that it was in 2003. </p>

<p>So given that the banks have clearly engaged in a long litany of foolish choices over the last decade, is it really so outrageous to think that the overuse of academic finance research might be among one of those foolish choices? </p>

<p>
[quote]
I don't think UBS would be having traders read another professor's research if it didn't explain something or show them a way to execute their trading systems.

[/quote]
</p>

<p>MSFHQsite, now I'm just feeling embarrassed for you. You really have the chutzpah to invoke UBS traders as your supporting example? Really? Are you sure? Have you been reading any of the news over the last week? What's the latest reports regarding how much Kweku Adoboli lost for UBS on unauthorized transactions that apparently were never discovered by management? The latest numbers indicate about $2.3 billion of losses, is that about right? </p>

<p>Let's keep in mind that this happened only a mere 3 years after UBS required a bailout from the Swiss government, for which the latest scandal has precipitated criminal investigations not only against the Adoboli, but also against the top management of UBS. </p>

<p>The bottom line is that UBS has proven time and time again to be an incompetently and possibly criminally managed bank. Your invocation of UBS is therefore nothing less than ironic. </p>

<p>Perhaps you'd like to try again with a better example? </p>

<p>
[quote]
Also, grow up. Only time I have ever heard that "those who can do, those who can't teach" crap is from high school students. Maybe undergrads have that opinion also since what they are learning is just the basics, but when you start taking graduate level classes and really start delving into the research that professors are doing, your opinion changes.

[/quote]
</p>

<p>Oh, and you don't think I'm intimately familiar with graduate coursework and management academic research, are you? I believe it is you that needs to grow up. Frankly, you know nothing about the actual research process. Believe me, I'm quite knowledgeable about the process of academic research, thank you very much. And it was precisely because of my knowledge of that process that has caused me to think that much of it is indeed, 'crap'. </p>

<p>Nor is this a minority opinion. Even most academics will tell you that the process of research and publication is akin to the process of producing sausages: you're probably better off not knowing how it is done. </p>

<p>But the proof of any pudding is always in the eating, which is why I declare the Sakky Challenge once again: name me a single financial crash that the finance literature clearly predicted in the months prior to its occurrence.</p>

<p>If you think the challenge to be unreasonable, why? If the finance literature can't make predictions regarding something as important as financial crises, then what exactly is its value?</p>