(Ben)
I'm enjoying a beautiful summer. Although my Ph.D. program at Harvard Business School has officially "started," I literally have no responsibilities or expectations whatever. When I tell people that, they always ask me, "So, what are you doing, then?" Well, aside from some pretty relaxed hours and plenty of time with the family, I'm doing research. It's usually at this point in the conversation that people get this puzzled look on their face as they try to figure out two things: 1) What, exactly, does a finance guy research? 2) What good will that do?
For any of you out there wondering, here are my brief, hopefully non-nerdy, answers. For those of you who could care less (and believe me, I'm not offended by that!), feel free to skip this post and hope for a much more captivating one from Jenn in the near future.
1) Economics is, by nature, more of an art than a science. We try to make it as scientific as possible, of course, but it's difficult to actually use the scientific method directly, since it's often unethical to run experiments on people. You can't, for example, take away all of someone's wealth and watch to see how they react. Animals don't make very good substitues for humans either: you can't give a rat a credit card an observe their purchasing behavior. So, economics research in general, and nearly all research in financial economics, relies on historical data to try to learn things about human behavior. Want to know what someone will do if they lose all of their wealth? Look at times in the past when this has happened and try to make guesses about how that will play out in the future. If you want to learn about purchasing patterns with credit cards, then you go to the credit card companies and ask them for all of their data and try to observe patterns from there.
With that introduction, here is what I do as a financial researcher: First, come up with a question and form a hypothesis. Then, a huge proportion of my time is spent trying to find and piece together data to test this hypothesis. Once the data is gathered, I test the hypothesis, usually using statistical tests of one kind or another. Lastly, I write a paper and try to get it published in an academic journal with the results of the study. Ideally, I would have about two of these projects going on at once, with possibly a few other things on the back burner ready to go in case one of the projects doesn't work out.
I won't get into the specifics of what I'm going to study. Suffice it to say that I'm studying risk management, banking, and other
corporate finance topics.
2) It's usually at this point that people are thinking, "Okay, you write a paper, so what? Who reads this stuff?" Admittedly, not very many people. I would say that there are three groups of people who read it: First, other academics read it, and then they go on to teach the up-and-coming MBAs these concepts, who will then take that knowledge into the business world. Second, lots of periodical writers are keeping tabs on the academic world. When something interesting pops up in an academic journal, it often makes it in to the
Wall Street Journal,
New York Times,
Time Magazine, etc. Lastly, there are a lot of industry professionals who read this stuff as well. Mostly these are guys who got their Ph.D. and, instead of teaching, work for hedge funds, banks, and other corporations. In that way, the knowledge gets passed directly to the companies that need to know it.