Huntsman Post

Jon M. Huntsman Presidential Visiting Professor Talks of Financial Theory

By Connor Child

A respected finance professor came to Utah State University recently and talked to Huntsman students about flat tires and nails in the road.

Hank Bessembinder, a Jon M. Huntsman Presidential Visiting Professor, spoke at a Dean's Convocation

Hank Bessembinder, who has been a Jon M. Huntsman Presidential Visiting Professor, was speaking at a Dean’s Convocation about an experience he had while in Vietnam that illustrated the best and worst aspects of the profit motive.

He said he noticed that thousands of people in Ho Chi Minh City commuted by motorcycles with thin tires on bumpy roads. He guessed that such conditions must create lots of flat tires. A Vietnamese friend pointed out that there were several people stationed near the roads who were prepared to immediately rush out and fix such flat tires – for a small fee.

“I’m thinking to myself, ‘Wow, what a wonderful example of Adam Smith’s ‘invisible hand.’ There’s a social need, and the market is stepping up to provide a solution,” Dr. Bessembinder said.

But before he could even finish the thought in his head, Dr. Bessembinder said, his friend told him that those same repair people would sometimes throw nails in the road to increase their business.

“Clearly, this is not what Adam Smith had in mind,” Dr. Bessembinder said.

Dr. Bessembinder, who graduated from Utah State University in 1977, was on campus to speak at a Dean’s Convocation. He is the A. Blaine Huntsman Chaired Presidential Professor at the Eccles School of Business at the University of Utah.

He talked about the underlying assumptions of financial theory, and examined the idea that a central goal in business is to increase shareholder value.

The discussion by talking about the virtues of a market-based system in which the pursuit of profit is emphasized. He said that a positive factor in the market system is the creation of goods at a price consumers are willing to pay.

“Prices tell us about values,” Dr. Bessembinder said, and he defined value as consumers’ willingness to pay. “Prices reveal how much society values goods and services.”

Additionally, Dr. Bessembinder said, a fair exchange of a product or service should leave both parties better off. Efficient decisions in this manner lead to a bigger pie, not one person getting a larger share.

But the profit motive doesn’t always lead to the most efficient outcomes, as illustrated by the Vietnam example. He also talked about Enron, WorldCom, and other instances where the pursuit of profit led to unfortunate results.

Dr. Bessembinder suggested that students should be trained in financial analysis to see through accounting fraud. He said that although business schools have been criticized as a result of the financial crisis, now, more than ever, is the time for students to learn about finance and the role of incentives so the market can function properly. He also said that educators should be reflective about the assumptions that underlie basic financial theory.

“In this day and age, to say the goal is to always maximize share price is too simple,” Dr. Bessembinder said. “I don’t think that we should tell our students, ‘your goal is to always maximize share price. It doesn’t matter how you do it, just maximize the share price.’ I think that gives you an Enron situation.”

Dr. Bessembinder’s hope for financial professionals and business leaders is that they would pursue shareholder value, but that they should do so honestly while meeting customers’ needs and wants.

Click here to view Hank Bessembinder's speech.