What B-Schools Can Learn From Option Theorists

The other day I was watching a re-run of the movie “Patch Adams”, where an idealistic young doctor wonderfully portrayed by Robin Williams is relentlessly subjected to attacks and harassment by the medical school’s dean, mainly for the unforgivable sin of spending lots of time at the hospital interacting with patients. Apparently, the dean believed that more hours immersed in theoretical books instead of dealing with real patients and nurses is what a true doctor needs. In the end, Patch is purportedly dismissed from the school, only to be rehabilitated by a panel later.

Applying the movie’s message to the state of b-schools, we might ask ourselves: how many professors want to be like Patch Adams, always priming practice and customer attention over theory? do b-school deans show the same prejudice in favour of theory and taste for the repression of alternative views as the one in the movie? do professors have Patch-like willingness and courage to confront a system they may deem too narrow-minded?.

Business faculty must remember that arguably the most influential contribution ever to come out of a b-school, namely the Nobel prize-winning Black-Scholes-Merton option pricing model, was designed by people who had a profound interest in the real world, and who subsequently went on to play key roles as high-level practitioners (in general, without abandoning their academic careers). Fisher Black became a Partner at Goldman Sachs. Myron Scholes was a Managing Director at Salomon Brothers and LTCM (which, in spite of its final downfall, was the premier hedge fund for many years) and currently manages money for one of America’s wealthiest families. Robert Merton held senior roles at LTCM and JP Morgan, and has recently founded a highly sophisticated financial consultancy firm.

Surely, these are the kind of people that students would like to see in the classroom, capable of producing the most relevant research as well as boasting the most cutting-edge practical experience. To b-school deans out there the message should be loud and clear: put a Black, a Scholes, or a Merton in your life!. And clearly, all well-meaning professors should attempt to at least try to emulate the outstanding academic-practitioner combination of the trio.

In this regard, the now sadly deceased Black had something extremely relevant to say, even more than ten years ago: on being awarded the prestigious Financial Engineer of the Year award in 1994, he flatly stated that he much preferred applied research to pure research, and that professors should be hired, promoted, and paid for their teaching, and not their research. Think this message would be generally well received in today’s b-school environment?.