Professor Stijn Van Nieuwerburgh teaches a class at NYU's Stern School of Business on Tuesday. (RJ Mickelson/amNY)
By Jessica Troiano
Special to amNewYork
Business school classrooms are abuzz with tales of bubbles, busts and bailouts.
Students who enrolled in b-school to advance their careers will graduate into a vastly altered financial arena. And professors at local universities are busy keeping track of each day’s bombshell development, while assuring students that the financial industry will survive.
“The full-time MBA students are really worried,” said Stijn Van Nieuwerburgh, assistant professor at NYU’s Stern School of Business, where most students study finance. “A lot of students want to know if they’ve made the right choice — not choosing Stern, but in choosing finance as a major.”
Van Nieuwerburgh teaches “Fundamentals of Finance” at Stern, and he’s spent the first few weeks of class assuring students that even in times of crisis, the fundamentals stay the same. “Concepts like the time value of money and how to discount future cash flows are elemental concepts that will never go away.”
Fellow Stern professor Viral Acharya agrees that basic knowledge of how markets function is still necessary for business students. “Teaching about capital markets is first about showing the models,” said Acharya. “But the beauty of understanding the model is showing when it doesn’t work.” The current crisis, he said, “is a way of illustrating why models fail and how they fail.”
The fallout from widespread defaults on subprime mortgages is also an important lesson for future finance professionals, says Acharya. “It’s showing the dark side of financial innovations,” he said. Lenders made risky loans, but passed along the risk by selling the debts to investors, who packaged them into securities. “Bankers who are making loans and ultimately don’t bear the risk of these loans,” said Acharya, “They don’t have the incentives to make the right loans. It’s very important for students to see that.”
The vulnerability of markets and institutions to human emotion is another hard lesson to learn from the demise of Bear Stearns and Lehman Brothers, says K. Ozgur Demirtas, assistant professor of economics and finance at Baruch College’s Zicklin School of Business. “There are two things at work in the economy: people’s expectations and the fundamentals of the economy,” said Demirtas. Bad financial news can create what Demirtas calls a “self-fulfilling prophecy.”
“If everyone thinks banks will go bankrupt,” he said, “banks will go bankrupt.”
Stern professor Van Nieuwerburgh says that while crisis hasn’t made him rethink the basic tenets of economics, it has exposed a need for more academic research on the financial sector, which has grown at a staggering rate in recent years.
“The obvious question is how do we prevent something like this from happening?” said Van Nieuwerburgh. “What is the role of government? These are all interesting questions that are crying out for an answer right now.”
