Fisher's Preeminent Financial Economist:
Strong Risk Management Foundation Critical
The events of the last two years have convinced René M. Stulz, PhD, of one thing: no undergraduate or MBA student should practice finance without a sound understanding of risk management, including the strengths and limitations of financial models for measuring risk.
"Good risk management is a source of comparative advantage for firms and this has never been truer than now," says Stulz, who serves as Fisher's Everett D. Reese Chair of Banking and Monetary Economics and the director of the Dice Center for Research in Financial Economics.
The Global Association of Risk Professionals named Stulz its 2008 Risk Manager of the Year - recognizing his commitment to furthering the role of risk management during a time of "dramatic evolution in the industry."
Stulz helped develop Fisher's new MBA curriculum so students can major or minor in risk management. Offered in the Department of Finance, the program was partially funded through a gift from Nationwide. Coursework focuses on financial as well as operational and reputation risks.
"This new curriculum allows Fisher to show once more than it is at the forefront of what is going on in business education worldwide," he explains.
Stulz delved into some of these risks in a recent Harvard Business Review article, where he outlined six perils of risk management. They included relying too much on historical data; focusing on narrow measures to track one's risk, which can underestimate a firm's exposure; overlooking knowable risks; failing to track down concealed risks; failing to communicate and not managing in real time.
There are many lessons to come from the current economic debacle, Stulz says, expressing hope that current events don't prompt countries to put obstacles to globalization, instead of using globalization's advantages to build a sounder economy. While he appreciates how far financial globalization has progressed, the crisis "has demonstrated the interlinkages between countries better than any teacher could have done in the classroom."
"The SEC (Securities and Exchange Administration) failed spectacularly in performing its responsibilities because it was focused instead on leveling the playing field through deregulation," says Stulz, contending that it failed to understand that the strength of U.S. markets internationally came partly from a strong regulatory regime that created trust in U.S. markets.
He currently is part of the Squam Lake Working Group, a non-partisan entity comprising 16 top financial economists who have joined forces to offer guidance on the reform of financial regulation. Stulz advises against viewing regulation as the sole solution. "Eventually, when the history of the crisis is written, it will be obvious that regulators bear a great deal of the responsibility for what happened. Investors relied on regulators to control systemic risk and they failed. Individual banks can't be asked to take into account the systemic risk implications of their strategies. Regulations should be designed so that systemic risks are tolerable for the country."
Meanwhile, he and other researchers have a rich array of research opportunities to examine why the U.S. financial system almost collapsed a year after the crisis's start.
"Finance will change considerably over the coming years," he predicts, concluding, "It is important for students to be demanding of the faculty - the old certainties should be questioned aggressively."