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The enduring importance of basic financial theory

Steven Kreider ’79 urged students to remember the lessons of Finance 101 when he delivered the Gruhn Lecture at Lehigh on Oct. 7.

In the late 1980s, after playing professional football for eight seasons, Steven Kreider ’79 applied for a job at an investment firm. He and two of the firm’s senior partners went to a restaurant but when they left and returned to the parking lot, they realized another car had blocked them in. While the partners stood helplessly in the rain, Kreider knew immediately what must be done.

“Hey fellas, we can push it. Let’s just push it,” Kreider said. And with that, Kreider walked to the offending vehicle and, with the help of the partners, simply moved it out of the way. When they got back to the office, he was offered the job.

Kreider believes this story encapsulates one of the most important lessons he has learned throughout his life: the answer to any seemingly complex situation is often very simple.

This idea was the theme of Kreider’s lecture, entitled “Theory Matters,” which he delivered Thursday, Oct. 7, in Baker Hall. The lecture was the third in the Distinguished Speaker Series in Finance in the College of Business and Economics (CBE). The series is endowed by Donald M. Gruhn ’49.

At Lehigh, Kreider was a Rhodes Scholarship finalist and an All-American in Division II college football. After graduating with a B.S. in electrical engineering, he was drafted in the sixth round by the Cincinnati Bengals. While playing in the NFL, he earned an MBA in quantitative analysis at the University of Cincinnati.

Net present value and options pricing

Kreider was one of only two Lehigh alumni to play in the Super Bowl, catching two passes for 36 yards in the 1981 game against the San Francisco 49ers. He completed a Ph.D. in finance at the University of Cincinnati and works now as a fixed-income investment manager with Western Asset, a firm that manages a half trillion dollars in assets for institutional clients around the world.

The answers to many of today’s economic woes, Kreider told his audience, can be learned in Lehigh’s classrooms.

“As a society, we haven’t paid attention to the lessons of Finance 101,” he said.

People working in finance and business, Kreider said, should reexamine two basic theories: net present value and options pricing. The first takes into consideration what one has to sacrifice today to get benefits in the future. The second can be better understood by studying “The Pricing of Options and Corporate Liabilities,” an article written by economists Fischer Black and Myron Scholes and published in 1973 by the Journal of Political Economy.

“These basic ideas are really important,” he said. “Therefore, your Lehigh experience really matters. Think the ideas through and use them in the field.”

The two theories are not the only ones that should be studied, Kreider said, and they cannot always be relied upon to work perfectly when applied.

Kreider did not place all the blame for the current economic recession on financiers and Wall Street. He said accountability for disasters like the housing market should be spread evenly from top to bottom. He noted that one third of credit card owners do not know their credit card interest rate and another quarter think it is less than 10 percent. These facts, he said, are sobering.

Kreider also advised students to take time to pursue interests outside their career field.

“I don’t know of a successful career that wasn’t made with a little sacrifice, but it’s important to be a well-rounded person,” he said. “I don’t know how you do your job well if that is all you do.”


Photo by Ryan Hulvat

Story by Deanna McLafferty

Posted on Friday, October 08, 2010

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