Is historical knowledge useful to business people? If so, what types of historical knowledge are most useful to decision-makers in finance? How certain can we be that history is really useful to practitioners?
Financial history has long been a major focus of research and teaching at the International Finance Center of the Yale School of Management. The ICF director, William Goetzmann, a finance prof who is the son of a historian, has published extensively on financial history. Scott C. Miller, a Yale ICF postdoctoral fellow in economic and business history, has published a very interesting and important blog post about the importance of teaching history in business schools. His post, which was shared today in a social media group for business historians, discusses the current state of business history teaching and research in leading US business schools. Miller’s focus is, quite rightly, on identifying the benefits to students of including more historical content in the curriculum of business schools. Miller argues, very plausibly, that this issue is very important not just to the individual students and their future job performance, but also to society as a whole. He observes that decisions about the MBA curriculum are highly consequential because they may change how people with really important jobs will make decisions: “it is largely business school graduates who will make the economic, financial, and business decisions that prepare the ground for massive societal change. As business schools train students to make these decisions, they have the duty to remind them of the implications of these decisions as well.”
Miller makes four separate yet related claims about the benefits of learning about history. I think that the cause of promoting business history in management schools will be served by each of his claims to a steel man critique, which is the spirit of my reply to his blog post. I’ve tried to respond to each of his points below.
- It prevents bad, ad-hoc uses of history in decision making. Whether we acknowledge it or not, humans are historical animals. We base most of our decisions not on incoming data, but rather on the historical and cultural frameworks through which we filter that data. Since historical and cultural forces shape not only how we analyze information, but also what and how data is even collected, historically-minded analysts are much better positioned to not simply process the data they have, but understand what data they are missing and why they are missing it.
On a practical level, teaching economic, financial, and business history well in business schools will help prevent the ultimate analytical error: fighting the last battle. Since humans intrinsically look to the past for guidance, they tend to find solutions in the past as well.
My thoughts: We are all familiar with the aphorism that generals are constantly fighting that last war. I suppose the desire to prevent this error helps to explain why staff colleges have invested so heavily in military history and why so many schools of policy analysis require their students to read the famous book by Neustadt and May called Thinking In Time: The Uses Of History For Decision Makers. I’m very confident that proper empirical research using such methods as in a randomized control trial would confirm the hypothesis that learning history and then thinking historically about important decisions can indeed be useful in promoting the correct use of history. However, right now this claim is just an untested hypothesis and we need to acknowledge that limitation in keeping with the principle of intellectual humility (the third learning outcome identified by Miller). Experimental research on the effects of learning history or thinking about history is still very under-developed, notwithstanding some important early papers by Gilovitch (1981) and others. I have long argued that the case for teaching business history in North American management schools would be boosted by the publication of robustly scientific research results that supports this hypothesis. Simply presenting this hypothesis as already proved by any shadow of a doubt may actually be counterproductive as it may cause sceptical audience members (e.g., your standard finance prof) to ask “How do you know that?” We need a iron-clad proof that teaching history is functional to overcome the opposition documented by Miller.
- It promotes long-term thinking. While we are unlikely to break the tyranny of the quarterly report any time soon, teaching history forces business school students to think in the longue durée. Analysts who think in the long term are less susceptible to mistaking volatility spikes for the greater trend, and thus better structure investments and firms that are successful over 20, 50, and even 100 or more years. (My SOM colleague Paul Schmelzing’s work on the “suprasecular” decline of interest rates over the last 700 years is a perfect example of this.)
Once again, the argument that learning business history promoted long-term thinking in businesspeople remains an untested hypothesis, albeit one that is very plausible to me. Miller’s claim that teaching history promotes long-term thinking is certainly more plausible to me than the view that the most cost-efficient way to promote long-term thinking is to change how we write dates. Some readers will be aware that Russell Brand and the Long Now Foundation have argued that changing the way we write out the date by adding a zero at the front (e.g., “02021”) would encourage long-term thinking and thus better decisions. The Long Now Foundation’s claim has never been tested, however.
Neither has anyone been able to test the theory that learning about financial history, the cycle of boom and bust, Tulipmania, 1929, and all that, makes a financial decision-maker behave in a less risky fashion. A couple of years ago, I sought out funding to run some experiments with some collaborators to test some of the claims that have been made over the years about the impact of teaching history in business. Unfortunately, the funders didn’t give us the money to do the research and nobody has, to my knowledge, done similar research.
As I wrote in 2018, one of the common justifications for teaching history to future managers and decision-makers is that awareness of the past makes them better judges of risk. After the 2008 financial crisis, which revealed that many managers had incorrectly judged financial risks (via misplaced optimism about the prices of particular securities), there were calls for the sharing of more historical information with businesspeople. For instance, the Bloomberg business news service established its Echoes column, which showcased economic-historical research related to the 1929 stock market crisis and other episodes in financial history. To date, however, nobody has rigorous tested the conjecture that promoting greater awareness of history would actually improve the behaviour of businesspeople by one or more measurable indicators.
Luckily for purposes, there is an extensive body of experimental research in psychology, finance, and other fields, on the determinants of individual’s levels of financial risk aversion. Many of these experiments involve requiring subjects to participate in the Iowa Gambling Task. Some of this research looks at how fixed traits (e.g., gender) influence risk preferences, while others examine how the administration of certain hormone (e.g., an injection of testosterone) can change a given individual’s level of financial risk aversion (see Nave et al., 2017; Kusev et al., 2017). In such experiments, risk aversion is usually measured through behaviour in games played for small sums of money. For our immediately purposes, the most relevant area of research on financial risk aversion relates to cognitive priming. In psychological research, “cognitive priming” involves presenting subjects with images or words that trigger the recall of prior knowledge that in turn has a measurable effect on many types of behaviour.
The question for us is: how does cognitive priming that surfaces an individual’s historical knowledge change their aversion to financial risk? Since we know from (Gilovich, 1981) that cognitive priming by evoking memories of different historical wars (World War Two, Vietnam) changes how American individuals thinking about proposed military action by the United States,[1] there are strong apriori reasons to expect that reminding people about different episodes in financial history would change individuals’ appetites for financial risk. In the experiment I proposed in 2018, subjects would be randomly divided into two groups. One group would be presented with a short historical text about the financial history of the United States in the 1920s that would end with the 1929 stock market crash. The other group would be presented with a short historical text about a successful entrepreneurial firm (say Intel) that does not include references to ANY financial setbacks and crises. We would then compare the behavior of the two groups on the Iowa Gambling Task, a computer game that measures appetite for financial risk. If there is a significant differences between the revealed risk aversion of the two groups, we will be able to confirm our hypothesis that historical knowledge changes how people perceive risk.
- It fosters humility. At the beginning of my economic and financial history courses, students routinely begin questions with some variation of, “We know that these people were less sophisticated than us, so…” By this they tend to mean, “we have better data, more developed analytic theory, and better computational tools, so I know that we would not have made these mistakes.” Interestingly enough, however, this prelude always disappears by the end of the semester.
Would repeated cognitive priming with references to history in either the classroom or the workplace serve to remind decision-makers of history in a fashion that would promote intellectual humility? Anecdotally, we know the Warren Buffett has explained his decision to put framed newspapers from the 1929 market crash in his office by saying he wanted to remind to surround himself with a reminder of bad decisions taken by other investors.
- It reminds students of the raw power to shape society that they will soon wield. I firmly believe that economic crises, not political or social trends, cause profound societal shifts. The Depression of the 1780’s, not independence from Great Britain, resulted in the U.S. Constitution.
Ok. Good point.
[1] This experiment (Gilovich, 1981) involved a population of US university students majoring in International Relations who were randomly divided into two groups. One group was exposed to text that reminded them of Neville Chamberlain, the well-known appeaser of Nazi Germany. The half of the population was exposed to texts designed to trigger the recall of knowledge about Lyndon Johnson, the President whose decision to escalate the Vietnam War is now generally perceived to have been a mistake. The subjects were then asked about a hypothetical situation in which the United States had the option to use military force against a non-democratic regime in a distant country. Subjects who were cognitively primed via the references to Neville Chamberlain were measurably more likely to support military intervention than those who had been subtly reminded of the Vietnam War via the references to Lyndon Johnson.
The Past Speaks 