• 28 Oct 2009
  • Lessons from the Classroom

HBS Begins Teaching Consumer Finance

Last spring HBS became the first top-ranked U.S. business school to offer a course in consumer finance. Professor Peter Tufano talks about the course and his determination to make consumer finance a broadly accepted academic pursuit. From the HBS Alumni Bulletin. Key concepts include:
  • The household sector in America represents approximately $61 trillion of assets.
  • The course helps students understand consumers and the financial service firms that serve them.
  • Four functions are studied: payments, movements of money from today to tomorrow (savings and investing), movements of money from tomorrow back to today (borrowing), and managing risk.
by Roger Thompson

Last spring HBS became the first top-ranked U.S. business school to offer a course in consumer finance. Jointly taught by HBS professor Peter Tufano and Harvard Law School professor Howell Jackson (HBS MBA '80), the elective course attracted 52 students, with one-third coming from the Law School. Tufano recently talked about the course and his determination to make consumer finance a broadly accepted academic pursuit.

Roger Thompson: Why did you want to teach a course in consumer finance?

Peter Tufano: The household sector in America is huge, representing approximately $61 trillion of assets. And consumer finance businesses are the touch points between the financial system and millions of consumers. Despite its size and importance, we had ignored this sector almost entirely in our curriculum.

Q: Was HBS alone in not offering a consumer finance course?

A: No. I surveyed the top twenty MBA programs in America and the top five in Europe. While some offer banking courses, and others offer behavioral courses, none had a course that was specifically about consumer finance.

Here at HBS, we have a rich set of finance electives, including courses on behavioral topics, investment management, financial markets, private equity, venture capital, financial engineering (which I also coteach), and a host of other topics. Retail financial services are also occasionally the subject of cases in other areas.

But we didn't have a course that would help students understand consumers and the financial service firms that serve them, including traditional banks, insurance companies, credit card issuers, and brokers, as well as a host of entrepreneurial ventures in this space.

Q: When did you get the idea to develop such a course?

A: The inspiration came to me ten years ago, about the time I got tenure. As I reflected on my post-tenure plans, I wrote about my interest in how the financial sector works for regular individuals. At the time, my colleagues thought this was an amusing concept.

Over the years my research has been increasingly focused on consumer finance, combining case studies, empirical projects, and experiments—the latter often in conjunction with the Doorways to Dreams Fund, a nonprofit I cofounded that is an R&D lab for new financial products for low-income families.

My first outlet for teaching the topic was an executive education program that I cochaired with [HBS professor emeritus] Dwight Crane for the Credit Union Executives Society. It was a relatively short hop from there to develop the broader Consumer Financial Services (CFS) Executive Education program at HBS. To prepare for that, I teamed up with Howell Jackson at Harvard Law School, who is an expert in financial institutions. We launched the CFS program two years ago, and it gave Howell and me the confidence that we could pull off an even more ambitious undertaking, a joint JD/MBA course, which we launched last January. This substantive example of intra-University collaboration also dovetailed nicely with my role as senior associate dean for Planning and University Affairs.

Q: It would seem that the timing was perfect given the many consumer credit and debt issues that played key roles in the economic crisis that hit last fall.

A: Howell and I have been working on these issues for a decade. With the economic crisis, the issues of household debt, retail financial services, and regulation in this sector came to the fore. But we'd be working on these issues and offering this course even if consumer finance was still unpopular. While it might have taken a crisis to convince some, we believed for a decade that this was an important sector that raised serious issues and deserved substantially greater attention in academia and the classroom.

Q: How did you organize the course?

A: We concluded that we needed a relatively simple set of ideas to organize the course. First, we adopted a functional perspective, a concept that [University Professor] Bob Merton and a number of us have been working on for the last fifteen years. The functional perspective posits that if we want to understand financial products or institutions, rather than look at product or company names, we should look at what functions they perform. In the classroom, we study four functions: payments, movements of money from today to tomorrow (savings and investing), movements of money from tomorrow back to today (borrowing), and managing risk.

Second, given the phenomenon we are studying, we wanted our students to understand three levels of analysis: households, businesses, and the broad political economy.

We begin with individuals and households. It's shocking to me how little we think about the family in the MBA Program. By the time our MBAs graduate, they will have looked at financial statements for hundreds of companies. Other than our course, they would have never looked at the financial statements of a single household. So we begin by having them analyze real numbers for real household budgets. We also bring in concepts from behavioral economics, psychology more broadly, and sociology. We have cases and materials that are at the household level, because we think that before you can discuss business practice or public policy, you must first understand households.

Q: What comes after looking at households?

A: The second level is the company and the industry. Here, we use a more "traditional" set of HBS cases that address a host of industries. What function does this firm perform? What are its economics? How can you deliver this function more efficiently? How can you build a competitive advantage against rivals?

The third level of analysis is the political economy. All the businesses that we study at HBS work in the context of a larger political economy. Consumer finance businesses, in particular, more so than many others, operate under substantial regulatory and legal scrutiny, and for good reasons. As it turns out, those legal and regulatory constructs are changing dramatically in the current environment.

Q: So how did the course go?

A: For a first offering, we felt the course went pretty well. We had students from both schools and the Harvard Kennedy School, used pedagogies and materials from HBS and the Law School, and even trudged back and forth across the Charles each week. The students learned a great deal more from the two of us than if either one of us had taught the course alone.

The students were engaged. The topics were interesting and important. We pulled together some just-in-time course materials, such as the Obama administration's home foreclosure proposals, so we could look at very current issues. We are enthused about teaching it again this year, and we're working on new materials.

Q: Where do you go from here?

A: I'm interested in helping build a field around consumer finance. To that end I've helped to create a seminar series for researchers at Harvard, the Boston Fed, and other local universities where we get together twice a year to talk about consumer finance research.

This fall, we're launching a national consumer finance working group at the National Bureau of Economic Research. I also participate in an FDIC program that funds consumer finance research. It's all part of a broader effort to legitimize this field as an important and rigorous area of research and teaching.

Fortunately here at Harvard, we have faculty and students at the Law School, the Business School, the Economics Department, and the Kennedy School who share this point of view. We've been trying to put our efforts together wherever we can to push this area forward. It's very exciting!

About the Author

Roger Thompson is the editor of the HBS Alumni Bulletin,.