Princeton Weekly Bulletin December 14, 1998
Spies asks real-world questions
By Caroline Moseley
How are stocks and bonds priced? What factors might determine
asset allocation? How do you take account of risk and uncertainty
in making financial decisions? And how in the world is interest
compounded?
Richard Spies with students in Introduction to
Financial Economics (photo Denise Applewhite)
These are among the very real-world questions addressed in Introduction to Financial Economics, a course taught by Richard Spies, who is vice president for finance and administration and lecturer in economics.
The course covers "the basic concepts and analytic tools of financial economics," he says. "We focus mainly on financial instruments and markets, though we also look at financial institutions."
Spies likes to describe financial economics as "a way in which people who are borrowers (this includes individuals but more importantly, corporations, governments and other large organizations) are matched with people who are savers or lenders (usually individuals, though sometimes organizations).
The same principles apply "at a global level -- what economists call the macro level," he says, "and at what we call the micro level -- in individual instances." The mathematics of finance is "just arithmetic, but the principles are pretty powerful."
Worth more today than tomorrow
Financial economics provides "a way of adjusting for the time value of money," Spies explains. A maxim he imparts to every student is, "A dollar today is worth more than a dollar tomorrow" the truth of which is expressed in interest rates.
"If I borrow a dollar today, you're going to ask me to pay you back with interest -- $1.05 or $1.10. Even if no risk is involved, there's a time value of money that makes you require me to pay back more than I borrowed. Conversely, if I offered to pay you a dollar one year from now, you surely wouldn't pay me a dollar for it today."
Spies likes to apply these principles to examples that have direct meaning for students -- such as student loans. "Students borrow money for their education," he says. "The government helps them by paying the interest for a certain time (which is really paying part of the cost of their education the time-value-of-money part). We go through calculations of the value of that interest subsidy, given that the student eventually has to take responsibility for paying back the loan, and the interest begins to be the student's problem."
While Spies teaches economic principles, he also crunches plenty of numbers. "I insist on going through the math of any problem," he says. "I want the students to be convinced that their results proceed logically and irrefutably from basic principles -- they don't just appear out of a black box."
Real-world applications
Spies "is wonderful in his ability to show real-world applications to the material covered," comments a student. Much of the course reading is from the Wall Street Journal and the financial pages of current newspapers and magazines. As text, Spies uses Principles of Finance (R.W. Kolb and R.J. Rodriguez, 1988); he also recommends A Random Walk Down Wall Street (1973), by Chemical Bank Chairman's Professor of Economics Burton Malkiel.
In a recent class Spies described 1990 Nobel laureate Harry Markowitz's "portfolio theory," which suggests ways of diversifying assets so as to maximize return and minimize risk. Then he proceeded to 1990 co-winner William Sharpe's "capital asset pricing model," a further development of portfolio theory.
He spoke rapidly, nonstop, without notes, his animated discourse punctuated only by the occasional "Right?" Striding back and forth, he covered the blackboard with numbers, mathematical symbols, equations, curves and coefficients. If any of the 40 students in this 9:00 a.m. class were still sleepy, Spies's lively approach to economic realities surely invigorated them.
Some great teachers
"I've been fortunate in having some great teachers myself," says Spies, who earned his PhD at Princeton in 1972. "Probably the single most important influence on me was Burt Malkiel.
He wasn't on my PhD committee because he was on leave at the time, but he taught Corporate Finance, and I precepted for him."
Spies also remembers "the first time I taught Corporate Finance as a faculty member in 1975. I taught with [James Madison Professor of Political Economy] Uwe Reinhart. I sat through the first half of the course while Uwe lectured, and we talked about how I would handle the second half." Both Malkiel and Reinhart, Spies says, "are among the best teachers I've had or known."
Teaching, says Spies, has many rewards. "It's fun explaining something I find exciting to people who are interested." He particularly enjoys running into former students now working in business or finance.
"They say, 'You won't remember me, but I took your class.' And they often quote me saying, 'A dollar today is worth more than a dollar tomorrow.' It's like a secret handshake."
Working with the budget
Spies joined the University in 1971 as assistant to the provost and lecturer in economics. He became assistant provost in 1972, associate provost in 1976 and vice provost in 1983.
As vice president since 1988, Spies's nonacademic responsibilities include "working with the budget, worrying about anything from facilities projects to Human Resources policies to trying to achieve savings using technology," he says. He also works with educational and governmental organizations; a current "very interesting connection" is with the N.J. State Investment Council, which he chairs. This group oversees investment of N.J. public employees' pension funds, amounting to $75 billion. "It's a very practical responsibility," he says. "I occasionally ask my simple math and finance questions and bring some of the answers back to class." He is also a director of the Consortium on Financing Higher Education and a trustee of his alma mater, Amherst College.
Spies doesn't see any disjuncture between being a top-level Princeton administrator and a dedicated teacher of Princeton undergraduates. "What I do isn't unusual," he insists. "There are several administrators, including President Shapiro, who teach pretty regularly. And of course there are hundreds of faculty members who do it every day.
"I don't think of teaching and administration as two worlds," says Spies. "They're just different parts of the same world."