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The foundation and future of finance

With renewed investment and focus, MIT Sloan asks how global finance faltered and how it can be saved

By Mary Tamer with Zach Church

Excerpts from Robert C. Merton’s notes for course 15.438, Investment Banking. Based on work done at MIT Sloan, Merton and colleagues Myron S. Scholes and Fischer S. Black developed a pioneering formula to determine the value of derivatives.

There has been wound licking and finger pointing, theorizing and sermonizing, but four years after the global financial collapse, there may be only one certainty: nobody—not Wall Street, not the government, not regulators—was ready.

Today, MIT Sloan’s Finance faculty is reexamining what went wrong, what must be done, and how the School’s network of established and future financial leaders can help prevent a reoccurrence.

Robert C. Merton, School of Management Distinguished Professor of Finance

“Finance is truly global; it doesn’t have meaningful borders,” said Nobel Laureate and MIT Sloan Professor Robert C. Merton, PhD ’70. “And, if you look at the financial crisis, one important element that senior management and their regulators really didn’t have was a rich enough, deep enough understanding of their tools.”

MIT Sloan has a tradition of leadership in financial education, but with new faculty, an emphasis on policy analysis, a coming research center, and a new, intensive one year Master of Finance program, its potential impact on the financial sector is significant.

“This is a time of dramatic change,” said David Schmittlein, John C Head III Dean. “And it’s a time when MIT and its broad community appropriately gathers to consider what’s been happening, to consider what needs to happen, and to challenge each other to help create the kinds of futures in this important area of the economy that the world needs.”

In April, faculty, alumni, and current and future students gathered in New York City for MIT Sloan Finance Day, a celebration of the School’s long and accomplished history as a leader in the world of finance, yet as one not willing to rest on its laurels. The Finance Group and its programs have grown and evolved with the field itself, both prior to and in light of the global financial crisis.

“Dave Schmittlein came in and committed to invest in finance and increase faculty,” said Stewart C. Myers, the Robert C. Merton (1970) Professor of Finance. “That started before the crisis. The size of the faculty, the composition of the faculty, and the programs that either are new or expanded happened before the crisis, so at exactly the right time.”

With three goals—innovative curriculum, investment in faculty and a new research center, and outreach to alumni and financial leaders—MIT Sloan is poised to continue its legacy in the science and art of finance into the future.

I. Curriculum Innovation

The way Bob Merton sees it, finance at MIT Sloan has been innovative for decades, right up to the present.

“I’m not alone in thinking that finance and financial engineering has a natural place here at MIT,” said Merton, who returned to the Finance Group in June 2010 after two decades at Harvard. “There was a theme that started 40 years ago that good, leading-edge research has had a profound impact on finance practice... It’s a theme of the Institute and a theme of the Finance Group.”

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