Clark, Gordon L. – Professor and Director, Smith School of Enterprise and the Environment, Oxford University

Gordon L Clark FBA DSc is Professor and Director of the Smith School of Enterprise and the Environment at Oxford University with joint appointments in the Saïd Business School and the Oxford University Centre for the Environment, holds a Professorial Fellowship at St Edmund Hall, is the Sir Louis Matheson Distinguishing Visiting Professor in the Department of Banking and Finance at Monash University, and is a visiting professor at Stanford University.  Previously, he has held positions at the Harvard University’s Kennedy School of Government, Harvard Law School, the University of Chicago and Carnegie Mellon University.  Acknowledged as one of the world’s leading authorities on the investment management industry, he serves on a number of investment boards at Oxford and elsewhere.  He advises governments, corporations and financial institutions on issues such as governance and management, and environmental sustainability.

How did you get interested in financial geography?

My MA and PhD theses were on patterns of regional unemployment in, respectively, Australia and Canada. My analytical perspective was informed by what was then called neo-Keynesian thinking, set in contrast to the dominant neoclassical paradigm.  I was very interested in people's employment prospects, linking the economic fortunes of cities and regions to macroeconomics. This thread of research carried through my time at Harvard, the University of Chicago, and Carnegie Mellon University.

So, to start, I had very little interest in finance or indeed financial theory.  But in these two theses I used advanced time series models to analyse the stability of economic variables over time and space.  These techniques made no assumption that the underlying processes were stable; rather, they were used to estimate the parameters on indicators of economic activity which were subject to discontinuity and stochastic shocks.  Later on, my familiarity with these ideas and techniques gave me an immediate way into understanding movements within financial markets.

Without this training I would have struggled to shift gears, conceptually speaking, when it came to framing my ideas around what we might expect of financial markets in terms of their stability.  Why I became interested in finance is a more complicated and personal story.

When I began as a professor at Carnegie Mellon University I was expected to work in areas of labour markets and regional economic development.  I had published a couple of books in this area, and it was a natural fit with the mission of the Heinz School at Carnegie Mellon.  But something unexpected happened.  My wife Shirley went to work for the United Steel Workers of America as one of their negotiators on health benefits and pensions.  Week in and week out she came home with stories about the massive pension and healthcare liabilities faced by US steel companies large and small.  The welfare of many hundreds of thousands of people was at stake, along with the future of their communities.

Once I became engaged in conversation with the union about these issues, it became clear that the same problems dominated many other established but declining industries such as automotives, airlines, and chemicals.  Fundamentally, any negotiation over corporate health benefits and pensions was a negotiation about the financial viability of the company and the industry.  This was an eye-opening experience: I came to understand that finance was not merely important; it went to the very heart of corporate decision-making, including corporate strategy, investment, and labor relations.

Ultimately, I published two books based on my time at Carnegie Mellon. One was devoted to the future of American unionism and the other was devoted to finance, corporate restructuring, and the management of pension liabilities.  I can say with some pride that the second book was endorsed by Senator (then Professor) Elizabeth Warren. Carnegie Mellon was important in another way.  My older colleagues Herbert Simon and Richard Cyert were at the forefront of research on individual behaviour, organisations, and decision-making. While I was very interested in their research, I don't think I wrote a single paper during that time on these topics.  But any reading of my publications over the past 15 to 20 years will show that I had been heavily influenced by the behavioural revolution that took place in psychology, cognitive science, and economics.

How did your interest in financial geography evolve over time?

What happened next?  We left Pittsburgh and went to live in Melbourne.  Once again, Shirley's career made an impact.  She went to work for an Australian insurance company that had a large asset management function.  Her role was to "sell" the asset management company’s services to the growing Australian pension funds that almost always outsourced their investment functions.  I learned that financial services were more fluid, more volatile and very much about managing assets as well as liabilities.  Which is not to say that finance isn’t just about liabilities; rather, the game played on the asset management side of the market was (and is) about accumulating assets under management, investing in stock markets, and ratcheting up exposure to different kinds of financial instruments and products in time and space.

Suddenly, the analytical methods used in my PhD thesis were highly relevant.  In fact, I remember having a tutorial with a finance guy in a Melbourne restaurant on the signal to noise ratio in markets, which could be directly tied to concepts embedded in my MA and PhD theses. Equally, the debate about behaviour and decision-making at Carnegie Mellon gave me a reference point when grappling with the dominant order of the day in financial theory: rational expectations and efficient markets.  I found these principles difficult to comprehend and accept.  I was imbued with the nitty-gritty of behavior and organizations gleaned through engagement with, and research on, financial and non-financial corporations.  At this stage, the craft of economic geography paid big dividends.  I had an analytical perspective combined with a sense of how people behave under risk and uncertainty to turn this particular paradigm on its head.

When I was appointed at Oxford, the global financial world opened up in front of me.  It was easily found – all I had to do was get on a train and go to London. And I did.  Not that it made a big impact, at least immediately.  I was still working on issues that had percolated to the surface based on my experience in the United States.  Nonetheless, the behavioral issues were increasingly important and were embedded in the series of papers with Neil Wrigley on sunk costs, escalation in decision-making, and the time-space of path dependence.  Also, based on my experience in Australia and the United States, I began writing the book on Pension Fund Capitalism (which was a play on Peter Drucker’s pension fund socialism).

What are you currently working on?

Thereafter, the finance industry started to pay attention to my research.  I have been fortunate to work with wonderful colleagues such as Dariusz Wójcik, and to work on really interesting projects that have carried the story of financial geography to where it is today.  While there is no straightforward way to summarise the research I have carried out over the past 15 years on financial markets, financial decision-making, financial skill and expertise, financial institutions, and financial innovation, the point I would like to make here has two parts.

First, the way I look at the world is through the lens of discontinuity and disequilibrium.  This has turned out to be very helpful in giving pride of place to both time and space when analysing financial markets and institutions. Second, I have been inspired by the behavioural revolution to think of behaviour not as a given or a product of rationality, but rather as something contingent on and embedded in time and space.  So, for example, over the past couple of years we have been looking at the significance of ‘external’ events on how people conceptualise and plan for their future wellbeing.  In these two different ways, I think of myself as a financial geographer – or as an economic geographer with an interest in finance – rather than a theorist and practitioner of finance.  Note, 10 or 15 years ago my perspective would have been, and often was, simply ignored as idiosyncratic or worse.  But there's nothing like a financial crisis to turn commonplace assumptions upside down.

Over the past decade, I have worked on individual behaviour and organisational design and performance.  The behavioural project was sparked by a project done on behalf of the (then) National Association of Pension Funds in the United Kingdom.  They wanted to better understand how pension fund trustees make investment decisions and the role of skill and expertise in that type of decision-making.

As it happened, one of my close friends was a well-known behavioural psychologist.  He and I and a PhD student went about testing decision-making and the role that skills and expertise play in effective financial decision-making.  We showed that the average pension fund trustee is no better than the average Oxford undergraduate on problems that have a financial flavour. Importantly, we showed that for a select number of pension fund trustees with higher-level training and education, they were far better than the average trustee or Oxford undergraduate in solving these types of problems.  Just as importantly, we showed that a general knowledge of finance was less important than specific knowledge relevant to particular issues.

Where is the geography in all this?  In essence, we showed that the domain or context in which decisions take place is fundamentally important in both framing the options considered in making decisions and in affecting the quality of those decisions.  These findings have far-reaching implications for conceptualising decision-making in space and time.  As I have suggested elsewhere, generalised education in financial literacy is unlikely to make a positive contribution to the average person’s financial wellbeing.

This thread of argument has been maintained over the past decade with a series of related projects on financial planning in different settings.  I could go on, but I also want to emphasise a second project which has been just as important for my research and for those of my students and colleagues.  This project has been about organisational design and performance in financial markets.  With a group of PhD students, colleagues from the financial services industry, and industry partners, we have used my skills as an economic geographer to understand how some financial organisations succeed in conditions of market risk and uncertainty and why others – notionally the same types of organisations –  fail. Here, context is important.

It's also an issue of how organisations are governed and managed in relation to the distinctive characteristics of global and local financial markets.  Ashby Monk and I are about to publish a book based on this research: Institutional Investors in Global Markets (Oxford University Press, 2017).

What are the most promising research topics for future financial geography? And equally, what are the most important challenges facing financial geography?

At this stage of my career, I'm not going to suggest the most promising topics for future research in financial geography or the geography of finance.  Even when I was a younger academic, I would have ignored such advice. Perhaps I ignored advice when I should have listened.  I'm sure my PhD supervisors could come up with examples here and now to that effect.  Nonetheless, I think academic disciplines thrive when confronting the present and future rather than solving the past.    

I have spent a lot of time talking to the industry, its intellectuals, its practitioners, and its policymakers, all of which have a fundamental interest in understanding what's going on. It doesn't mean that I have always taken their thoughts seriously.  But I have tried to understand the culture of the industry – what is a problem, what isn't a problem according to them, and how we might find common ground.  So, I would work on topics that are important to the world at large.

On occasion, industry commentators have noted that I was the Halford Mackinder Professor of Geography at Oxford before I became the Director of the Smith School of Enterprise and the Environment at Oxford.  Is that important? Not really.  There are all kinds of academics wandering around in the finance industry, including anthropologists. 

The point I want to make is that you can claim a certain status or space by virtue of your discipline.  But it is really about adding value rather than being a certain type of academic from a certain type of discipline.  So my advice on this point goes as follows: it's not about proving that a geographical perspective is important to your academic colleagues, it's about weaving geography into explanations of how financial markets, agents, and organisations function such that your insights have value.

It's worth observing that the finance industry understands only too well that time and space are the enemies of good financial decision-making.  More often than not, in a conversation about organisational design and performance in financial markets, those I speak to will observe that current conditions are not "normal".  Later on, they will observe that it's different in Shanghai (or Singapore, or Sydney, or New York).  That is, the ever-present fact of life is that time and space are fundamentally intertwined in the conception and execution of investment strategies.  In fact, they are so intertwined that it's taken for granted and rarely explicitly commented upon – unless they are talking to an academic or unless some shift has occurred such that the geography of finance is in play.  Witness the debate about the future of London in a post-BREXIT world.  One thing that financial geography can do is to bring to the foreground that which is hidden in the background.

What kinds of impact beyond academia should financial geographers strive for?

What do I think of the industry?  It's an opportunity to do research.  It's also an exciting, vibrant an often chaotic world.  It's a world being remade constantly, albeit normally incrementally through the millions and millions of trades done overnight here and around the world.  Some academics characterise the financial services industry as the enemy – as the expression of the evils of a neoliberal world.  I have no doubt that there are many aspects of the financial services industry that deserves criticism with insight and understanding.  But too often, facile description combined with rhetorical gesture stands in place of deep understanding and analytical sophistication.

I have also suggested that understanding the industry can involve partnerships with financial service firms and asset owners like pension funds and sovereign wealth funds.  Where appropriate, these are excellent opportunities to delve deep into the murky world barely glimpsed in the news media.  Again, these partnerships often aid the research process while adding to the organisations that sponsor the research.  I have no problem with this type of research.  Indeed, by inclination and commitment I have sought-out academic appointments that have rewarded this type of research.

Where I part company with some of my academic colleagues from other disciplines is where their interest in certain theories of market performance along with their interest in certain types of financial products combines to shift research from understanding and insight to marketing.  If self-interest is an ever-present problem in applied research, so too is naivety and a wilful disregard for the welfare of others.   

I stand by research that has practical value especially when I believe it is the best available knowledge on a given topic and it is consistent with realising the best possible outcome given the alternatives.  Why? As I have become responsible for financial decisions and organisational innovations that affect the lives of many people I have come to realise that whatever the virtues of theory-building for one’s career, in the end one must be mindful of the costs of taking theory to the limit. 

Unfortunately, we were not able to ‘road-test’ the theory of rational expectations and the efficient markets hypothesis before the on-set of the bubble that precipitated the global financial crisis.  While objections were raised, they were ignored in the rush to canonise theory.  Economic geographers, perhaps more circumspect about their virtues, have much to offer.  Here, I am especially attracted to a recent comment made by Susan Smith (2013, 76): “an elephant in the room of the recent financial crisis is analysts’ limited understanding of the behavior, and especially the volatility, of housing prices.  The problem is compounded by the fact that other disciplines have failed to comment, though arguably they could.” 

Interview by Dariusz Wójcik and Theodor Cojoianu, School of Geography and the Environment, Oxford University


Posted in Interviews.