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Most of the 100,000 or so MBA students who are graduating this month, and by all accounts heading into an improving job market, embarked upon their business education in fall 2009, the official midpoint of the Great Recession. Along the way, they absorbed the slings and arrows of a society that blamed their predecessors, especially those in the lucrative financial sector that many of them aspire to work in, for triggering the market meltdown. As commencement season shifts into high gear, it is worth asking: Has their education, in particular finance courses, prepared them to steer us away from future crises, in what are sure to be even more volatile times? As someone who has made it my mission to retool the business curriculum at MBA programs around the world, when it comes to finance, at least so far, I fear the answer is ‘no’– the heavy lifting is still ahead. For years, and especially since the 1980s, the standard issue finance curriculum has taught graduates to trust in markets — almost without exception. Market “frictions,” such as insider trading and market volatility, receive short shrift in finance classrooms and textbooks, as have past economic crises and exactly what caused them. Meanwhile, the use of mathematical models to explain financial concepts and guide decision making has grown. Unfortunately, those models are often oversimplified. Even worse, they frequently support business decisions that shift costs to wider society, affecting employees, host communities or natural resources. Last fall, the Aspen Institute’s Business and Society Program invited 17 scholars from leading business schools to reflect on the teaching of finance and how it might need to adapt in the future. Among those in attendance were authors of the dominant finance textbooks, leading finance researchers and curriculum designers. Certainly, no one at the meeting was eager to throw out financial theory on market efficiency. However, many agreed that we should reexamine the degree of credibility we lend to it. Instead of a finance curriculum oriented around an essential truth, like “markets are efficient” — professors can reveal a more nuanced view of markets — one that equips students to challenge conventional wisdom, or at least place the model in context. Drawing on the conversations at Aspen and our experience working in business schools for more than a decade, I suggest five “new” essential truths to guide the teaching of finance. A focus on risk As ever more sophisticated models of finance came to the fore in the practice (and teaching) of finance, what about the discussion of the commensurate risks? In the recent financial meltdown, the most dire consequences could have been predicted, and averted, had financial managers — many once business students themselves — been encouraged to focus as intently on the potential risks, as on the predictive value of the models. Risk is now the subject of renewed study and is a hot topic in classrooms. But when the crisis fades from our minds, we cannot let go of this essential truth: The promise of modern finance is to democratize access to capital, and to address scarcity through increasing prosperity. Managing risk is fundamental to fulfilling this potential. Questions trump models Information technology has allowed for major innovations in finance over the last decades. With classroom time at a premium and complex models to teach, students gain a false security that the models yield the “right answer.” This is rarely true in the rough and tumble world of capital markets. The right answer instead comes from asking knotty questions about the broader context in which investments occur. Faculty can model this culture of inquiry in their classrooms. Institutions matter Optimal market functioning rests on a broadly held understanding of both the guiding principles and decision rules that undergird the financial system, as well as its constraints — things like the role of government regulation and the importance of reputation to the market makers. Today, courses about institutions like commercial banking — once common — are hard to find in business schools; the focus is on the stock market, with very little about the credit markets. Now is a good time to restore to the teaching of finance a more holistic — and realistic — view of the full array of institutions and protocols that drive healthy capital markets. Crises happen Financial history offers no shortage of crises to study — yet business history as a topic in business schools has lost ground, and historical analysis of markets gets scant attention in teaching of finance. Students need a more robust understanding of crises, mispricing and asset bubbles — which have been happening with greater frequency. For example, teaching about a past crisis like Japan’s experience — a massive bubble followed by languid economic growth from 1991 through to today — doesn’t guarantee we’ll avoid the next one. But it helps put decision making in context. Obviously, the U.S. market offers up other data and plenty of examples to mine… Incentives are key One aspect of the market meltdown is rarely debated: Key actors in the financial crisis acted rationally in light of the incentives under which they operated. An immense loss of value was the result. So if MBA graduates naturally respond to the incentives at play in the firms they join after graduation, why try to change the teaching of finance at all? The short answer: because MBA students, in the not-too-distant future, will hold sway over those very incentives — by which we mean public policy as well as compensation — and must be prepared to think critically about who wins and loses under multiple scenarios. One faculty member put it well: To understand — and then work to fix — the misalignments between private incentives and public welfare is exactly what we need most from our leaders — whether they work in a bank or the Treasury Department. The best business schools turn out candidates for both. The fundamental purpose of finance is to allocate capital efficiently. As we train the next generation of leaders in finance, we’d better ensure these freshly minted MBAs have learned that efficiency in finance means so much more than a narrow focus on profit maximization. Judith Samuelson is executive director of the Aspen Institute’s Business and Society Program, whose Center for Business Education produces Beyond Grey Pinstripes, a biennial survey and alternative ranking of business schools.