By John Stoehr
You can’t miss the tall stack of copies of The Review of Financial Studies teetering on the shelf across from Jonathan Ingersoll’s desk at the Yale School of Management, each volume of which is wrapped in plastic, unopened, and unread. It’s a tell-tale sign, Ingersoll says, of how much his profession has changed since his arrival at Yale in 1982.
“No one actually reads a journal anymore,” says Ingersoll, the Adrian C. Israel Professor of International Trade and Finance, who will retire at the end of the 2017-18 academic year. Scholarly publications are now as wired as everything else. “By the time it’s been published in a journal, you either already know about it or you probably don’t care about it.”
The prestigious journal’s editors are unlikely to take offense. Ingersoll is a predecessor of theirs and founding member of the Society for Financial Studies, which began publishing in 1988. (Ingersoll has also served as an associate editor of the Journal of Financial Economics and the Journal of Finance, the other two of the Big Three in the study of finance.) “When I first started, you really could keep up with the entire academic field. There’s so much more now. You could not read everything. If you go online, there’s a hundred things uploaded in a day.”
Ingersoll helped create the groundwork for a generation’s worth of finance scholarship and innovation. With economists John Cox and the late Stephen Ross (both of MIT), Ingersoll was part of a wave of thinkers whose ideas helped Wall Street boom like never before. They introduced in the late 1970s what became known as the Cox-Ingersoll-Ross model (or CIR model), a formula still used to determine the movement of interest rates and to figure out the valuation of interest rate derivatives—instruments like swaps, caps, and floors whose value moves with interest rates. (The CIR model is also known as a bond-pricing model.) If you can pin down the price of one thing, you can pin down the price of another. As Ingersoll says: “Tell me the price of tomatoes, and I’ll tell you the price of ketchup.”
Wall Street used to trade in mostly stocks and bonds. But thanks in part to the Cox-Ingersoll-Ross model, the derivatives market—the market for those securities like options and futures whose values derive from an underlying asset—has grown into a goliath. Depending on whom you ask, it’s worth more than 10 times the total world Gross Domestic Product (some estimates are far more conservative). Cox, Ingersoll, and Ross helped make that possible, along with other giants, like three of Ingersoll’s mentors at MIT: Fischer Black, Robert Merton, and Myron Scholes, who developed the Black-Scholes-Merton model, which is still used to price options.
Some take a dim view of derivatives in light of the financial crisis of 2007-08, leading up to the years-long Great Recession only recently ended. Ingersoll sometimes introduces his class by joking that, “I’m going to teach you how my colleagues and I ruined the world with derivatives.” For his part, he’s reconsidered, since the last crisis, the difference between models and the real world. “The problem with many models is that it’s horse racing,” he says, “but we model as if it’s roulette. In roulette you know exactly what the odds are, but a horse race is all based on opinions and the payoffs depend on everyone’s opinions.”
Ingersoll earned his doctorate at the MIT in 1976 and taught at the University of Chicago before arriving at Yale SOM as a visiting associate professor of finance in 1982 (he earned the rank of full professor a year later, before receiving his current named chair in 1985).
One of Ingersoll’s students in those early years was William Goetzmann ’86, who had made documentary films and directed the Museum of Western Art before coming to Yale SOM. At the time, he knew nothing about finance, he says. Then he took a couple of classes with Jonathan Ingersoll. The rest is history. He is now Edwin J. Beinecke Professor of Finance and Management Studies at Yale SOM, and directs the school’s International Center for Finance.
“The way he teaches is very clear and intuitive,” Goetzmann says. ”What you see is reasoning in which there’s a logic that’s not complex or opaque and is based on fundamental principles. So you realize that if you get the basic concepts right, you can build a whole world out of that.”
As a colleague, Goetzmann has authored four papers with Ingersoll on hedge funds, the measuring of money manager performance, and other areas of inquiry. “When you walk into his office with an interesting problem, he becomes absorbed and excited by the prospect of exploring the problem,” Goetzmann says. “That’s when academia works best—when it’s serious play.” As a friend, Goetzmann goes to lunch with Ingersoll three or four times a week. “He’s a gracious and kind person with no sense of hierarchy. When I joined the faculty, he was so welcoming.”
Clinton Tepper, a 2014 Yale SOM graduate who took Ingersoll’s financial engineering course, found similar inspiration, nearly three decades later. “He was the single best teacher I have ever had in a quantitative subject, bar none. I was a physics undergrad and then an MBA student. He took concepts that were extremely complex and distilled them in an intuitive way. Amazingly well-taught course.”
Tepper is now a PhD student at UCLA, studying hedge funds and their interaction with markets. While Ingersoll’s teaching wasn’t the only factor going into his decision to pursue a terminal degree in finance, it was a significant one. “He wasn’t flashy but he taught in a way that visualized the mathematics and he was extremely responsive. He facilitated the course like a discussion. That’s uncommon in a financial engineering course.”
Tepper uses one of Ingersoll’s books in his doctoral coursework in asset pricing. But he can’t remember its title, he says, since “we just call it ‘The Ingersoll.’”
Indeed, Ingersoll’s Theory of Financial Decision Making is now canonical. Published in 1987, it has “influenced a generation of financial economists,” Goetzmann says. (Ingersoll says he hopes to update the textbook after retiring.)
Looking back on 35 years at Yale SOM, Ingersoll offers wisdom he’s shared with doctoral candidates aiming to join him as a colleague. The job, he says, has two parts: There’s a need to focus on real-world problems. But it’s important to be a thinker, to value the time it takes to puzzle through a problem, which is sometimes at odds with the demands of Wall Street. “That’s the difference between scholars and hedge fund managers,” he says, “I don’t do much consulting, because having the time to think is more important to me than money.”
Goetzmann concurs. Despite his impact on Wall Street, “Jon has always focused on the academic side. He is the rocket scientist who’s interested only in the science. He’s the consummate gentle professor.”
Interviewed on August 18, 2017