Wednesday, February 09, 2005

Re: Robert Shiller Puts Blame On The Educational World

February 9, 2005

Re: Robert Shiller Puts Blame On The Educational World For The Lack Of Business Ethics.
From: Dean Lawrence R. Velvel

Dear Colleagues:

In a posting of January 26th entitled Plagiarism and Gonzalezism, this blogger said that Harvard, having trained so many of our dishonest leaders, must bear part of the blame for the dishonesty which pervades the country like the 1918 flu. This is the kind of position with which one expects to find little or no agreement.

To my surprise, on February 8th The Times carried an op-ed column by Robert Shiller, the famous Yale economics professor, which takes a notably similar position. Speaking about the widespread lack of ethics in the business world, Shiller blames this on the kind of education received today in the "modern business curriculum." Dishonesty, of which this blogger wrote, is a species of the currently prevailing lack of ethics in business (and elsewhere). So the point made by this blogger is not so different from the point made by Shiller. Both of us blame educational institutions -- at least in part -- for bad conduct that we observe in the world.
Having been surprised -- and delighted -- to read Shiller’s view, I have appended his column to this posting.*

*This posting represents the personal views of Lawrence R. Velvel. If you wish to respond to this email/blog, please email your response to me at Your response may be posted on the blog if you have no objection; please tell me if you do object.

February 8, 2005

How Wall Street Learns to Look the Other Way
New Haven--THE New York Stock Exchange's report on the pay package given to its former chairman, Dick Grasso, made clear the excessiveness of the compensation and the ineffectiveness of the safety controls that failed to stop it. What the report didn't provide, however, was an answer to an obvious question: Why did nobody on the exchange's board look at that astronomical sum and feel some personal responsibility to find out what was happening?I can't read minds, but I think it's fair to say that to some extent the players in this drama - as well as those in the ones now being played out in courtrooms and starring former executives of Tyco, WorldCom and HealthSouth- have been shaped by the broader business culture they have worked in for so long. And, as with any situation in which we are puzzled by how a group of people can think in a seemingly odd way, it helps to look back to how they were educated.

Education molds not just individuals but also common assumptions and conventional wisdom. And when it comes to the business world, our universities - and especially their graduate business schools -are powerful shapers of the culture. That said, the view of the world that one gets in a modern business curriculum can lead to an ethical disconnect. The courses often encourage a view of human nature that does not inspire high-mindedness. Consider financial theory, the cornerstone of modern business education. The mathematical theory that has developed over the decades has proved extremely valuable in general. But when it comes to individuals, the theory runs into some problems. In effect, it portrays people as nothing more than"maximizers" of their own "expected utility." This means that people are expected to be totally selfish, constantly calculating their own advantage, with no thought of others. If the premise is that everyone would steal the silverware if he knew he could get away with it, and if we spend the entire semester developing the implications of this assumption, then it is hard to know where to begin to talk about ethics.

At the notorious Aug. 7, 2003, board meeting in which Mr. Grasso was given the right to pocket $139.5 million, questions of whether the compensation was too high were aired but got nowhere. Maybe it is not too surprising that they were ignored: executive compensation has been soaring in recent years, and to people today, it may well seem that these increases must be entirely the result of respectable "market forces." Modern business education often encourages excessive respect for anything that can be considered a result of the free market. For example, the leading corporate finance textbook, "Principles of Corporate Finance" by Richard A. Brealey and Stewart C. Myers, lists the efficient markets theory ("security prices accurately reflect available information and respond rapidly to new information as soon as it becomes available") as one of the seven most important ideas in finance. The other six are even less personal, models of perfect markets that only mathematicians can fully appreciate.

It should not be surprising that those who were trained by books like these would not consider the possibility that there could be a bubble in executive compensation. The book does not have anything kind to say about regulators like the Securities and Exchange Commission, the regulatory agency that strives to make sure that we can trust the securities we buy. The commission is rarely mentioned, and then only as a source of a few bothersome rules that must be followed, without giving any clue as to the reasons for the rules. (It is worth noting that it was the commission that asked the stock exchange's board to disclose Mr. Grasso's pay package; otherwise, the controversy might never have come to light.) Yes, some business school curriculums have been improving over the years. Many schools now offer a course in business ethics, and some even try to integrate business ethics into their other courses. But nowhere is ethics seen as a centerpiece or even integral part of the curriculum. And even when business students do take an ethics course, the theoretical framework of the core courses tends to be so devoid of moral content that the discussions of ethics must seem like a side order of some overcooked vegetable.

I like to assign my finance students "Take On the Street," an account by Arthur Levitt of his efforts, as chairman of the S.E.C. in the 1990's, to clean up the sleazy side of Wall Street. I wish more professors assigned it. But most of my colleagues tell me they do not have time for it; too many formulas to cover. Ultimately, the problem at the university level is a tendency toward overspecialization. Each professor gains expertise in a certain kind of research skill; that is how subject matter is defined. The specialty of financial theory has largely come to be defined by skills manipulating a narrow class of mathematical models of purely selfish behavior.

Business ethics is just another academic specialty, and can seem as remote as microbiology to those studying financial theory. Whatever happens with Mr. Grasso - and with Dennis Kozlowski of Tyco and the other avatars of corporate misconduct in the headlines these days - we should be reminded that ethical behavior for many business people must involve overcoming their learned biases. Perhaps these scandals would be a little less likely, and the rationalizations for them a little less tenable, if more of us professors integrated business education into a broader historical and psychological context. Would our students really fail to understand the economic models if we treated the subject matter not as an arcane specialty, but as part of a larger liberal arts education? Robert J. Shiller, the author of "Irrational Exuberance," has taught Economics 252, Financial Markets, at Yale College since 1985.

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