Adapting Finance Courses

Change often happens incrementally and slowly. In the economics textbook market, for example, there is an unwritten rule that new textbooks cannot differ more than roughly 15% from the standard textbook in order to be ‘acceptable’ (Colander, 2003).

While our book clearly breaks this rule and proposes more far-reaching and fundamental changes in most chapters, in this chapter we focus instead on how existing courses could be adjusted incrementally. By doing so, we hope to assist educators in improving and adapting the courses they teach without needing to rip them up and start again, as well as helping students make suggestions for how this could be done.

First, we set out the typical contents of current courses. Second, we provide our suggested additions and changes. It is important to note that we pose all these suggestions as potential sources of inspiration, not a checklist of all the things that necessarily should be included. After all, there is a practical limit to what can be taught within a single course.

Courses:

Over the last decades, financial markets have grown exponentially and their complexity has also increased drastically. Finance courses try to help students make sense of this imposing world by explaining different kinds of financial products and markets. Moreover, courses teach neoclassical theories of how the financial world can be understood as being in efficient equilibria brought about by rational optimising behaviour. Typically, courses start from a highly simplified world in which everything is certain, markets are ‘perfect’ and all available information is incorporated in prices. Then (calculable) risk and market imperfections are introduced to account for the complex reality of our world. Building on these ideas, a number of neoclassical models such as the capital asset pricing model (CAPM), arbitrage pricing theory, the Black-Scholes model, and intertemporal equilibrium models, are taught. And with the help of these models, financial products such as derivatives, fixed-income securities, and options, are discussed. Recently some courses are also integrating insights from behavioural and complexity economics, which focus on irrational and unpredictable behaviour.

Frequently used textbooks:

It is important that students get to know the actual financial world, not only theoretical ones, for four reasons. First, it motivates students because it makes the often abstract material come alive. By visiting a financial institution, or market, it is no longer just numbers and equations, but also actual people of flesh and blood. Second, it can help students better understand the theory. This is often how the real world is currently incorporated in courses. With the help of examples, the theory is demonstrated to help students grasp what is meant by abstract statements. Third, exposing students to the real world helps them better understand it. This sounds almost tautological, but it is important to note as understanding the real world is too often underappreciated as a goal in itself. By giving students assignments, case studies and lectures that focus on explaining the complex and messy real world, rather than a theory about it, they will learn how theories can help them but also what their limitations are. Finally, making students familiar with the workings and details of actual financial institutions and markets is crucial as it helps them acquire practical skills and knowledge that they will need in their future work. Many of these skills and knowledge will be of little theoretical significance, but nevertheless vital for students’ later functioning in an organisation.

For more detail, see Building Block 2: Know Your Own Economy and Building Block 9: Problems & Proposals.

Current finance courses could be enriched by incorporating post-Keynesian insights into fundamental, or Knightian, uncertainty, credit dynamics, and animal spirits. We applaud the recent incorporation of behavioural and complexity insights, often related to systematic irrationality and systemic risk, in some finance courses, and encourage teachers to do so even more. To broaden the scope further, cultural insights, among other things into how analytical constructs, such as economic models, can shape real world markets, can be incorporated.

For more detail, see Building Block 7: Research Methods & Philosophy of Science, Building Block 8: Economic Theories.

Teaching Materials

Financial systems are complex human constructions that know many varieties. To function well in this environment in their later careers, students need to become familiar with the various ways in which financial systems can be organised. This ranges from different micro-level practices and rules inside banks and specific markets, to macro-level structures that determine what characteristics and dynamics shape the system as a whole. Given the limited teaching time, it can be useful to focus on giving a brief overview of the wide variety of possibilities that have existed around the world throughout history, or have been proposed, and then going in more detail into the current domestic institutional framework.

For more detail, see Building Block 5: Economic Organisations & Mechanisms and Building Block 6: Political-Economic Systems.

Teaching Materials

A finance course without attention to ethics is incomplete. However, we should not stick to a narrow conception of ethics in finance, discussing illegal trading practices or other obvious forms of deceit. Ethical questions concern the core of finance itself and how financial systems are organised. What is the goal of finance, or what should it be? This is a key normative question for students to discuss. Why does finance exist, in the first place? And how is the financial system connected to the rest of the economy and our broader society?

Current courses are often (implicitly) based on the idea that the main goal in finance is to make the highest financial returns possible, and therefore focus mainly on teaching how to put an ‘optimal’ portfolio together. This normative premise should be discussed and this is a good opportunity to let students themselves debate, in written or oral form. What are the implications of this focus on maximising profits for other societal concerns?

What would need to change if these other normative goals were given more priority? Environmental, Social, and (corporate) Governance (ESG) is increasingly important in actual financial markets, so to provide future-proof education it is important that students become familiar with these and how to deal with them. Rather than only asking how one can earn the highest returns, one can ask how financial professionals can best serve society and provide students with the tools to do so.

For more detail, see Building Block 1: Introducing the Economy and Building Block 10: Economics for a Better World.

Teaching Materials

Good history lessons are a uniquely strong tool to present the complex reality through captivating stories. Historical knowledge of finance also allows students to place current events in context and better grasp their significance and origins. This does not have to be the deep past: the history of recent financial developments can be just as informative and useful.

Besides the history of financial markets themselves, the history of ideas about finance is also fascinating. The intellectual history of finance is largely characterised by two main long-standing strands of thinking. The first strand, deductive in nature, is often referred to as equilibrium models. It originates from the physiocrats in the 18th century and is a central part of modern-day neoclassical economics. The second, more inductive approach, is known as accounting or stock-flow consistent models. This strand of thought was born in the ideas of Jean-Baptiste Say and can today be found in modern-day post-Keynesian economists. This history can help students better understand the different theoretical ideas and models about how finance works.

For more detail, see Building Block 3: Economic History and Building Block 4: History of Economic Thought & Methods.

Teaching Materials

To create space for the above suggested additions, we advise focussing more on the key ideas and intuitions behind the taught models and devote less teaching time to their technicalities and mathematics. As teaching students to reproduce and work through mathematical models often takes up a large part of the teaching time, this would give the teachers the opportunity to devote more time to practical knowledge, the relevance, institutions, and history. Furthermore, a more even balance between neoclassical economics and other economic approaches could be achieved by decreasing the number of neoclassical ideas and models that are taught.