The Purpose of a Finance Professor

Alex Edmans is Professor of Finance at London Business School. This post is based on his recent paper, forthcoming in Financial Management.

My paper, The Purpose of a Finance Professor (forthcoming in Financial Management), is a write-up of a keynote speech that I gave at the Financial Management Association 2021 Annual Meeting. I decided to give a keynote on an unusual topic because I believe that the academic finance profession has the potential to be uniquely purposeful due to four characteristics—the freedom to take risks and work on what we’re passionate about, the loyalty to our profession rather than just our institution, the collaborative nature of the creation and dissemination of knowledge, and the magnitude of our potential impact. However, what the profession currently values, and its current social norms, are significant barriers to the fulfilment of this potential. The goal of the talk, and the accompanying article, is to highlight the special features of our profession that we often take for granted and ignore, and propose ideas to make it not only more impactful and relevant, but also more collegial and fun.

There are many generic talks on how to have a purposeful career that aim to apply across all professions. I thus focus on the above four dimensions because they are special to the academic finance profession—although some may apply to other academic disciplines beyond finance, and a few even to non-academic professions.

The first unique dimension is the freedom to work on whatever topic we’re passionate about. Ours is a profession of hard knocks, with multiple rejections and harsh discussions, but if we’re working on what truly excites us, we’re willing to pick ourselves up and persevere. It also means that the years invested in a paper were well spent, even if you’re disappointed by the eventual publication outcome. We also have the freedom to work on open, unexplored questions, even combining insights and methodologies from outside of finance.

But many researchers don’t leverage that freedom. Common advice is to research what’s hot, even though this may lead to marginal contributions in a crowded area. Moreover, the paper-counting nature way in which we’re evaluated encourages us to work on popular fields, to maximize the probability of a top publication, rather than taking risks and trying something new.

The second dimension is the significant amount of luck in our profession. A publication may depend more on the referee draw rather than the paper’s inherent quality; a chance encounter leads to a productive co-authorship; bad luck means that someone else is working on the same idea. Of course, skill, creativity, and hard work matter, but we underplay the importance of luck and overplay the signal contained in a single publication, leading to path dependency. A lucky publication as a PhD student significantly improves your job market outcome; quickly publishing your job market paper can lead to a move “up”. We draw substantial inferences from a person’s institution—indeed, we may decide not to talk to someone at a conference because of the school on their nametag—so it affects future outcomes.

Path dependency now extends to our PhD students. To get into a good program, you’re advised to have a masters, undergrad experience as a research assistant (RA), and even a predoc. As with the publication process, we’re excessively conservative and go for safety rather than innovation. Someone with non-academic experience, or who only discovered their passion for research later in life, may have diverse skills useful for innovative work.

The third dimension is the non-rivalrous nature of our profession. In an M&A deal, only one acquirer can win the auction; one investor’s trading profit is another’s loss. In contrast, journal space is not finite, particularly given the move to online journals, and our loyalty is to our profession not our institution—we trust the recommendations of “rival” schools when deciding who to tenure at ours. We can thus view other academics as our colleagues in the creation and dissemination of knowledge—providing feedback on their papers and sharing their work.

However, some faculty have the “pie-splitting mentality” that the profession is a fixed pie, so the only way to increase their slice is to reduce others’—by trashing them on anonymous message boards or failing to acknowledge their research. But reducing our colleagues’ slice doesn’t mean more for us—instead, the pie will be taken by companies and consultancies, who are increasingly releasing sloppy research that claims what practitioners want to hear and thus boosts their image. The general public, which includes donors, are increasingly skeptical about the value of academic research, believing we can’t agree on anything. While there are legitimate disagreements (e.g. different methodologies reaching different results), we focus too much on them rather than highlighting the substantial areas of academic consensus, leaving a big open goal for consultancies to shoot into.

The final dimension is the potential impact of our work. All professors create and disseminate knowledge, but we do so in finance—which affects how companies invest and fund themselves, how citizens save for the future, how agents share risks, and how resources are allocated to their best use. Yet the profession places very little weight on either teaching or impact outside academia in tenure or hiring decisions. Most teaching ratings reward entertainment and popularity rather than challenging and stretching students.

The article proposes a number of specific suggestions for how the profession can be improved. These ideas are only the musings of one person. Others may have quite different ideas. I hope this essay will not necessarily advance my suggestions, but encourage a discussion more generally about how our profession can become more impactful, relevant, collegial, and fun.

The complete paper is available for download here.

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