Although unusual in me, I have a moderate rant on professors in Panama who teach the Modigliani-Miller theorems. Let us first refresh what this theorem addresses (and these excerpts are from www.ifa.com):
The Modigliani-Miller Theorems concern decisions about aspects of the accumulated savings stock. The basic model was formulated in Modigliani’s and Miller’s essay, “The Cost of Capital, Corporation Finance” and “The Theory of Investment” (1958). Two other important essays followed in 1963 and 1966. Using this basic model, Miller and Modigliani derived two so-called invariance theorems, now known as the MM theorems. As Peter Bernstein asserts, “You have only to mention these letters to finance people, and they know what you mean.”
The Model of Portfolio Choice and the Capital Asset Pricing Model focus on financial investors, while Merton Miller, initially in collaboration with Franco Modigliani, established a theory for the capital market relationship between the capital asset structure and dividend policy of production firms and firms’ market value and costs of capital.
The main message of the MM theorems is as follows: a firm’s value is unrelated to its dividend policy, and policy is an unreliable guide for stock selection. The MM theorems have become comparative norm for theoretical and empirical analyses in corporate finance. Merton Miller, who died in 2001, is the researcher who has dominated these analyses during the last two decades. He has made a unique contribution to modern theory of corporate finance.
In the latest particular case of a college professor at a graduate course, the assignments revolved around establishing fictitious cases where the students had to resolve the MM theorem using given assumptions of the likely outcome of different investment, their expected pay-offs, and the cost of a fixed pay-off with insurance. This is an exercise that involves basic non-linear programming, and most problems are also solved using simple matrix multiplication.
The problem begins when the professor makes the assignment tedious, by making most of the numbers variables. When I saw the problems I recognized an equation easily solved with substitution. The problem was all of them gave me negative solutions, and negative outcome solutions in the system of equations meant the solution had no mathematical solution within the positive real numbers, so it could not be solved.
Now, I was puzzled. I did not study mathematics, but a majored in finances and have resolved more complicated problems using complex non-linear programming in Python and Java. So I was either having a very unlucky day, I had sudden amnesia, or all the problems indeed gave solutions outside the expected positive real number realm.
The student in question returned to class with an empty solution assignment, frustrated, and I was left to ponder why it had happened. No matter how hard I searched the Internet I could not find a solution to these problems.
It turned out the professor had indeed made all the problems unsolvable, and the rest of the class was spent making assumptions as to what the finance teams would have done in real life.
Is it me or this seems the most idiotic class in the world? I already have a big enough problem in Panama, where colleges graduate MBA’s who are hardly fit to manage a hot dog stand, let alone a more complex business. Why on earth would the professor spend so much time teaching problems without a solution? I could understand explaining one or twice of these in class so students would know what to expect in real life, but the whole class teaching unsolvable equations? I would think explaining non-linear programming to solve systems of equations is a much better topic. Or even explaining how to correctly rate given probability rates using statistics is also a valuable choice. But I fail to understand why a professor would show off his (lack of) knowledge of the matter with the poor selection of assignments.
I tend to find fault with the deans of these colleges, who barely look at the curriculum of their professors, and at the professors, who confuse a pile of papers stacked together from different sources with real college course material that coherently address a subject. Our colleges are full of said individuals, to whom form is more important than content, and who are more interested in using a suit while lecturing than the innate content of the lecture.
Mediocre professors produce a constant batch of mediocre students who later become mediocre businessmen and women. As the value of a college degree lessens every day, colleges will resort to softening doctorate programs as students are desperate to obtain another degree to make a difference in their resumes. Colleges will respond with doctorate programs of inadequate quality, but easy enough to keep the college income high and the students from dropping out. When money and not quality of education dictates the standards of society, the result is a mass of poorly prepared individuals who will surely fail when the benchmarks of market dynamics became unachievable to the ignorant and uneducated.
Sadly we might not have the students to blame, but the institutions and educators who were in the first place also ill-prepare to teach.
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written by Administrator