Finance Professor Says Market Collapse Has Changed the Way Finance is Taught

3/30/10 ASHLAND, Ohio --A finance professor at Ashland University in Ashland, Ohio, says that the rules for the financial game have changed; turning the world of finance "upside down" and changing the way finance degree students are taught.

"The drastic collapse of the financial markets from 2007 to 2009 made us realize that the traditional theories of finance are archaic and that new ones have to be found," said Tom Harvey, associate professor and head of the finance degree program at Ashland University. "The financial theory we learned was developed between 1952 and 1973, and many of those rules relative to financial theory no longer apply today."

Harvey said the absence of financial theory has provided many research opportunities as finance professors seek to understand how people are making asset allocation decisions.

"It really has changed what we teach and how we teach it. For example, we no longer can teach the efficient market hypothesis or the Black-Scholes option pricing model," he said. "Finance professors are realizing we need to be in the behavioral finance literature."

Harvey said the traditional finance centered on the expected utility theory, which suggested that investors weigh their alternatives very carefully and always make the choice that will give them the greatest benefit.

"But, it is evident that people are not rational and they make choices between alternatives very subjectively. Human beings have always brought their experiences, biases, moods, emotions and expertise into the decision-making process, especially when dealing with money," he pointed out.
Harvey explained that over the past 30 years, there has been increased interest in behavioral finance, which actually has its roots in "The Wealth of Nations," first published in 1776 by Adam Smith. Behavioral finance is grounded in psychology and the ways in which people make decisions.

"Behavioral finance brings human traits like risk aversion, overconfidence, pride, fear, greed, regret and familiarity among others into the conversation, but none of these are applicable to investors in every circumstance or all of the time," Harvey said. "Thus, it is very difficult to theorize as to how financial decisions are made. Two investors with the same background and experience can look at the same investment opportunity with one deciding to buy and one opting to sell."

Harvey said today's finance degree students are seeing other changes also.

"We are teaching them to be much more vigilant about what is going on in the market and that is done through watching cable and surfing the Internet to see what people are saying," he said. "You really have to be innovative in the classroom today. For example, we are starting conversations with the psychology department on campus to see if they have theories that might apply."

While the Dow had returned 228.55 percent during the 1980s and 317.59 percent during the 1990s, the first eight years of the new millennium saw it lose 23.66 percent, which was the first time there had been a loss since the 1930s.

"All of this was the result of the bursting of the subprime lending bubble in the summer of 2007, which ravaged housing prices and caused the failure of Bear Stearns, Merrill Lynch, Washington Mutual, Lehman Brothers and numerous commercial banks," Harvey said. "It was reminiscent of the Crash of 1929 and the beginning of the Great Depression. Something was definitely different in 2008 and 2009, and something was definitely wrong. The traditional theory of finance says that it shouldn't have happened, but it did as there was chaos in the financial markets."
Harvey said that in the midst of the financial crisis, on Oct. 19, 2008, 11½ billion shares of stock traded hands on the New York Stock Exchange, which was double the amount usually traded during one day.

"Fear gripped the financial markets, and irrationality dominated thinking," he said. "None of this should have happened under the tenets of traditional financial theory, with its emphasis on logical and rational thinking."
Harvey noted several other items that are changing today's financial game:

·         The number of Americans owning stock has increased by 114.86 percent to over 90 million between 1985 and 2005;

·         The number of shares traded increased by 3,128.35 percent during that same period, between 1985 and 2005.

·          Advances in technology, especially the Internet and cable/satellite television, have made being in the stock market quick and easy, and the American public flocked to it. In 1995, 7.3 million Americans had an online brokerage account. By 2004, that number was over 53 million, and by now, it is estimated to be over 100 million.

·         71 percent of Americans use the Internet in their financial dealings whether that is just obtaining information or actually trading on E*Trade, Schwab, Ameritrade, etc.

Harvey currently leads one of the most notable finance degree programs in private higher education. Ashland's University's Finance program is distinctive because it includes the study of investment theory, which students put into practice by managing two portfolios of approximately $400,000 apiece on real-time basis; the study for NASD Series 7 examination; the study for the NASD Series 66; networking with corporate partners such as Edward Jones, AXA Equitable, New York Life, MetLife and Smith Barney; and participating in conferences.

Graduates with an Ashland University finance degree are being placed in prominent positions with Edward Jones, ING, Farmers Insurance Group, National City, MBNA, Wells Fargo, MetLife, Putnam, Key Corp., AXA Equitable, Morgan Stanley Smith Barney, KPMG, Cohen & Company, JM Smucker, Westfield Group, New York Life, and Bank of America.

A key aspect of Ashland's Finance program is the Trading Room, which offers a real-life trading room environment that functions as a classroom as well as a laboratory facility. Through a large screen television offering access to live coverage of CNBC and CNNfn, Bloomberg and other financial networks, and tickers and data walls, which update security prices and exchange rates continuously, students experience the challenges of an actual trading environment, real time market data and a vast amount of research data. In addition, the individual double workstations include computers with software for simulated and real-time trading, settlement, analytics, pricing, portfolio management, research and derivative pricing. The Eagle Investment Group, a student-run organization, manages approximately $800,000 of the University's endowment.

For more information regarding Ashland University's Finance degree program, contact the Office of Admission at 1-800-882-1548 or 419-289-5052, or email at enrollme@ashland.edu<mailto:enrollme@ashland.edu>, or visit the Finance degree program website at www.ashland.edu/students/programs/finance<http://www.ashland.edu/students/programs/finance>.

3/30/10