Yale Curriculum: The Investor
On the last day of the Investor course, Nicholas Barberis, the Stephen and Camille Schramm Professor of Finance, ran through a list of famous scholars who have shaped the history of the financial world. Up on the screen came a photo of Harry Markowitz, who invented risk-reward analysis in the 1950s; followed by Bill Sharpe, who devised the CAPM asset-pricing model; Eugene Fama, who developed the theory of efficient markets; Myron Scholes and Robert Merton, who created the Black-Scholes options-pricing formula; and Robert Shiller, the Stanley B. Resor Professor of Economics at Yale, who helped launch behavioral finance, which argues that investors often act irrationally. Students had spent the previous month and a half learning about the theories of these men, but unlike in other introductory finance courses, the exercise wasn’t merely theoretical. “We can’t just say we need to learn these models because academics devised them,” Barberis said. “We need to show how they solve real problems.”
The Investor course is one of eight Organizational Perspective courses for first-year MBA students. Its aim is to teach future managers about the different types of investors they’ll interact with when running an organization. “Market efficiency is an interesting idea,” Barberis said. “But we want to know what makes it important in the outside world.”
Through the lecture-based course, Barberis broke down the investing world into two basic categories: primary and intermediary investors. Primary investors are those with capital to invest — namely, individuals, pension funds, and endowments. The intermediary investors are the mutual funds, hedge funds, insurance companies, or private equity firms that decide how best to invest the primary investor’s funds. The first part of the course focused on the primary investors and the problem they face allocating funds across broad asset classes, such as domestic bonds, domestic equity, international equity, real estate, and private equity, among others. Barberis addressed this problem by leading the class through intensive risk-reward analysis. The second part of the course moved on to intermediary investors, where Barberis discussed the problem they face allocating funds within an asset class — for example, picking specific stocks from within the U.S. equity universe — and showed how this can be approached by studying various techniques of fundamental valuation.
The Investor is one of the core courses in the Yale Management Integrated Curriculum, which aims to teach students how to handle the real problems modern managers face. SOM students learn to study an issue from multiple angles and take into account a variety of constituents. To this end, the Investor moved beyond strict financial interpretations of problems, broadening the discussion to include psychology, economics, and organizational behavior. Students learned not just how to assess markets, but to study the forces — irrational as well as rational — that mold them. “It would be easier if finance was all we had to worry about,” Barberis said. “But that’s not the real world. Take psychology, for instance. It can be helpful in understanding what goes on in markets. Often it’s the fault of poor decision making. Real-world finance is much more than just crunching numbers.”
Early in the course, students put their knowledge to the test in the Stock Market Game, a study in the nature and behavior of markets led by Roger Ibbotson, a professor in the practice of finance. Students received a certain amount of money, shares in four imaginary companies, and just enough information on them to make things interesting. Over the course of 90 minutes, students bought and sold shares, purchased analyst reports on the companies, and banded together in an attempt to outperform the initial set of shares kept in a market portfolio. Barberis said there were some stark truths learned by the students at the end of the experiment. “The average investor is going to earn the same returns as the market itself,” he said. “This means that while half should out-perform the market, half will also under-perform it. This is a harsh lesson for bright, hard-working people to learn.”
For Madeline Ravich ’09 the lesson was one of many. Coming from the nonprofit world, she had no finance background. When the course started, she said she knew the difference between stocks and bonds, but little else. “By the end, I felt I had a good grasp of all the key financial concepts and theories,” she said. “But just as important, I now understand finance from the perspective of investors and a CFO. Although I don’t expect to be leveraging up any nonprofit, I can relate to donors better and should be able to help a nonprofit operate more efficiently.”
Barberis said it is important for students, even those who do not plan to become investment managers, to grasp the concepts and language that rule Wall Street. “All managers need to be able to speak that language since they will likely need to interact with bankers and money managers,” he said.
Since a key part of the Investor is to translate theory into practice, Barberis found ways to bring the real world into the classroom. Bill McGlashan, managing director at TPG Ventures, spent a class expounding on the world of private equity. He also guided students through a recent acquisition, an exercise that left Dave Bledin ’09 impressed. Bledin was an investment banker before coming to SOM and worked on many deals. But this was different. “He showed us confidential documents drawn up in advance of the deal,” Bledin said. “He took us through all the analysis and due diligence they did. I have a finance background and never did I have that kind of exposure. The experience was invaluable.”