MIT Masters of Finance Convocation

Windham's Mark Kritzman addresses MIT Graduates, June 7, 2018

Good morning and congratulations. As many of you know, I’m not used to speaking without a PowerPoint presentation, but surprisingly Heidi didn’t show much enthusiasm for that idea. When I mentioned my concern to my wife, she said: “Don’t worry. You’re good at giving eulogies.” So if what I say sounds a bit sad, you’ll understand why.

Of course, I’m joking. This is such a happy occasion. Happy for you students because you are about to graduate from the world’s best masters of finance program. Happy for you parents because your children are about to embark upon what almost certainly will be exceptionally successful careers. And happy for MIT because your coming success will reflect so favorably upon us.

To the students, I would like to remind you of the huge debt of gratitude you owe to your parents for the support, guidance, and comfort they have given to you over the years. I don’t mean to downplay your own skills and hard work, but I’m sure you will all agree that your parents deserve much credit for helping you arrive at this happy occasion.

To the parents, you should be so proud of your children. First, for qualifying for admission to one of the most selective graduate finance programs anywhere. And second, for successfully fulfilling all of the requirements for graduation. I can assure you that I would not have wanted to sit for the exams some of my colleagues subjected your children to. That they are sitting here today is a testament to their extraordinary abilities and effort.

You should also be proud that your children have chosen finance as their profession. In the wake of the financial crisis, we often hear politicians and people in the media criticize finance, but they are disingenuous. Finance is a powerful force for good. Like in all professions, some people in finance have misbehaved, but the overwhelming preponderance of financial professionals work honorably every day to make the world a better place. They work so that people who labor in the real economy are able to transfer their risk to others, which enables them to deliver their goods and services to many more people than would occur otherwise. And they work to ensure that prices are set properly so that capital is allocated efficiently, which raises the quality of life for everyone. The virtues of finance may not be readily apparent in how we perceive our daily lives, but look around the world and ponder the relative economic well-being of nations, and then consider the relative sophistication of their financial systems. As my colleague, Andrew Lo likes to say, finance is to the real economy what the circulatory system is to the human body. That strikes me as a fitting analogy, especially for those of you parents here who might have preferred that your children had studied medicine.

Now please indulge me for a few minutes as I describe MIT’s position in the history of finance. As some of you realize, much of modern finance was invented by professors from MIT. Think of the legendary economist, Paul Samuelson. Yes, he is better known for his contributions in other fields of economics. In fact, he referred to finance as his Sunday activity. I guess we should be thankful that he played tennis instead of golf, which would have taken up more of his time. So on his Sundays he laid out the efficient markets hypothesis. Through his work in pricing warrants, he paved the way for the eventual discovery of the options pricing formula. And by exploring the connection between time and risk, he profoundly changed the way people think about risk – and the way many people now invest. Then there was Franco Modigliani who revolutionized corporate finance with his invariance propositions – that the value of the firm does not depend on dividend policy or whether it is financed with equity or debt. I once asked Franco if he realized at the time how important his work would become, and he said, “Yes, I knew right away because my colleagues were so upset with me.” You see, he overturned much of his colleague’s prior work. And, of course, there is the ground-breaking discovery of the options pricing formula by Fischer Black and Myron Scholes and separately by Bob Merton. Stew Myers wrote the book on corporate finance – literally, along with developing the key theories of capital structure, budgeting, and valuation. And then, of course, John Cox made so many contributions to options pricing and term structure modeling. That’s a pretty impressive list of accomplishments.

Now let’s think about the major innovations that occurred away from MIT. Yes, there were a few – for example, portfolio selection by Harry Markowitz, the two-fund separation theorem by James Tobin, the capital asset pricing model by Bill Sharpe, John Linter, and Jan Mossin. (Of course, we could claim that it was invented here by Jack Treynor, who was studying under Franco Modigliani at the time). Then we have arbitrage pricing theory by Steve Ross, who later did spend half his career here, and Ken Arrow’s work on the role of securities. Yes these innovations occurred elsewhere, but what you may not realize is that they were validated here at MIT by Bob Merton’s work in continuous time finance. Bob showed how to reconcile portfolio selection and the separation theorem with expected utility theory. He resolved the issue of the instability of the CAPM and APT. And he showed how to reconcile Ken Arrow’s work, which presumes few securities and many markets with the empirical reality of many securities and few markets.

My point is that there is no institution that has a stronger claim as the birthplace of modern finance than MIT. And the work here continues in such important ways. Leonid Kogan is exploring the link between a firm’s economic activity and its stock price behavior. Andrew Lo’s adaptive markets hypothesis extends the neoclassical foundation to incorporate behavioral considerations. Debbie Lucas is doing important work to help governments embrace the teachings of modern finance. And Jiang Wang is extending the theory and practice of finance to China. Although MIT has Massachusetts as part of its name, it is a global institution that seeks to make the entire world a better place.

These are just a few examples. Everyone on the finance faculty is contributing to the ever growing legacy of MIT.

Why do I dwell on this? First because I think a little substance is good in a talk that is otherwise pretty fluffy. But mainly because I want you to understand the lineage that you are now part of. There is no stronger brand in finance than MIT, and you will now carry that brand with you for the rest of your lives. You are ambassadors of MIT finance, so make us proud.

Now let me turn to the typical purpose of a speech like this, which is to impart wisdom. I could give you practical advice about how to navigate the challenges of advancing your careers, especially given the mistakes I’ve made. But that’s not what I want to focus on this morning. Please come and visit me another time for that kind of advice.

Instead, I would like to convey just two messages to you. The first is be honest. Not only is it the right thing to do, but being trustworthy is a huge part of your human capital, alongside your intellect, your training, and your brand. If you cannot be trusted, you will bear a huge cost that will follow you throughout your careers. And trust me – no pun intended – people will learn very quickly whether or not they can trust you. So it is in your interest to be trustworthy.

The second message is about how you treat people. You are exceptional. You are highly intelligent, you have a great work ethic, and now – as evidenced by your presence here this morning, you are extremely well-trained. The odds are quite strong that you will be very successful and attain a high professional status. You will meet many important people, but you will also meet people who will not have achieved a lofty professional or social station. My message to you is to treat everyone the same – which is with dignity, respect, and kindness, whether they are your superiors or your subordinates.

I have little doubt that you will be successful, but will you be happy? Because, despite your best intentions, it is likely that you will often find yourself in conflict, both in your professional lives and in your personal lives. My advice again is to be respectful. You may disagree with some people, but it does not mean that they are not sincere in their beliefs. And, moreover, if you show respect, you will have a better chance of resolving your conflict.

This will be hard to do on a consistent basis. You are entering a very competitive profession. You will almost certainly encounter conflict, and when you do, you will be tempted to treat people who are in conflict with you as objects – objects whom you see as interfering with your plans and not worthy of respect. This attitude will not help you resolve conflict. You will be much more successful in dealing with conflict or even avoiding it by being respectful. And the easiest way to be respectful is to see others not as objects but as people who have aspirations, needs, concerns, and fears, just as you do. The more you see the humanity in people, I firmly believe that you will have a much happier and more peaceful life. And that may be the true measure of success.

Congratulations and please do stay in touch.

MFin Covocation: MIT Sloan School of Management 06/07/18