Academics

Why Understanding Finance Is Key to Understanding Business Itself

Elizabeth Robertson (M.S. in Commerce '22) asked UVA McIntire professors why they believe understanding finance is crucial when it comes to understanding business.

I’m the only student ambassador in the M.S. in Commerce Finance Track this year, so it seems only fitting that I write a blog featuring the incredible faculty we study under and the subject that they teach. Throughout my year at McIntire, I have learned countless ways finance affects our everyday lives. Whether or not you understand it, the field of finance is around you and impacts you every day. It is complex and evolving–and, in the words of McIntire Professor Gayle Erwin, “more of an art than a science.” Students in the Finance Track have had the opportunity this semester to start wrapping our heads around the complexities of this subject and learn ways financial data can inform strong sound business decisions.

I reached out to our professors for help locking down on why they thought having an understanding in finance is key to understanding business itself. First up is Professor Patrick Dennis, who teaches our Asset Management class on Monday and Wednesday mornings. In his class, we learn about trading stocks, bonds, and options, as well as portfolio management theory. Professor Dennis provides strong practical advice on why an understanding of finance and markets is important, not just for students who want to work in business, but for everyone in general:

“In my view, understanding finance is the key to decision making in commerce. A great marketing strategy or insight from business analytics is nice, but if that doesn’t result in adding shareholder value then it’s worthless. Take MoviePass – you can watch all the movies in theaters you want for free. It’s a great way to build market share fast – and also go bankrupt.

Another benefit of understanding finance is that you will make better decisions for building personal wealth. Starting to invest when you’re young and taking advantage of compounding is one of the smartest things you can do. Einstein once said, “Compound interest is the eighth wonder of the world. He who understands it, earns it … he who doesn’t … pays it.”  Most people sell low and buy high when it comes to investing personal wealth in markets – this is totally backwards. As we have been discussing in class, when prices are low, that means there are good times (high expected returns) ahead. But when prices are low is when most folks sell in a panic. Understanding finance keeps you from making dumb investing mistakes.”

Next, I reached out to Professor Zhaohui Chen, who teaches our Special Topics in Finance class on Monday afternoons. In this class, we tackle problems and find solutions in Intermediate Corporate Finance, and have recently spent time analyzing the pros and cons of taking companies public via SPACs. In Professor Chen’s view, efficient resource allocation and evaluating value creation ensure a business is operating in the most efficient manner. Analyzing financials can provide key insights into how a business can improve its operations:

“Finance is important for business because it provides systematic ways to forecast and evaluate potential value creation. It is perhaps the most important discipline to ensure efficient resource allocation.”

“Finance is important for business because it provides systematic ways to forecast and evaluate potential value creation. It is perhaps the most important discipline to ensure efficient resource allocation.” –Professor Zhaohui Chen

In the Finance Track, our Tuesday begins with Professor Stefano Grazioli and his Financial Information Management class. Here we are being introduced to topics that bridge our other classes in finance with information technology. With the assistance of Professor Grazioli, we have spent the entire semester building a “robo-trader” that compete in a hedge tournament against our other classmates’ “robo traders” at the end of the semester. The goal of this competition is to hedge risk of the market and provide steady returns for our respective portfolios. Professor Grazioli provided me with some insight as to why studying information technology combined with finance is paramount for students as they begin their careers:

“Finance is being transformed by advances in information technology. Sometimes called fintech, digital innovation has changed the way consumers and finance professionals think about banking, investing, and insurance. These activities can now be done through smartphones or mediated by digital platforms that connect communities of investors, lenders, and borrowers. The controversial emergence of cryptocurrencies has generated enormous societal interest, and possibly even accelerated the digital transformation of central banks, some of which are now considering issuing digital currencies. Algorithmic and high-frequency trading are two fields where technology has played a critical role in finance.

I believe that understanding these changes is a main ingredient for success in the fast-paced financial industry, and that the leadership of the McIntire M.S. in Commerce made a very enlightened choice when it decided to incorporate into the Finance Track a course in financial analytics that focuses on coding, database skills, and the construction of a robo-trader – an algorithmic trader able to manage a complex portfolio of securities by making financial decisions in real time. An increased literacy and comfort level with technology will serve our students well as they progress in their careers.”

Tuesday afternoons are spent with Professor Felicia Marston and Professor Gayle Erwin. Professor Marston taught us firm valuation techniques and Private Equity leveraged buyout strategies for the first half of the semester. Professor Erwin took over where Professor Marston left off to tackle the topics Mergers and Acquisitions as well as Bankruptcy and Restructuring. Professor Erwin touches on why studying finance is important in today’s day and age:

“We live in a world of scarce resources, and finance is about efficiently allocating them to their highest-value uses while managing risk. Given the enormous challenges the world is facing due to climate change, the pandemic, and the war in Ukraine, the efficient allocation of resources is more important than ever. However, as product and labor markets have become less competitive and wealth has become more concentrated, the allocation of resources has become increasingly inefficient, further compounding the problems the world faces. The integrated nature of the M.S. in Commerce Program at McIntire means that finance is not taught in an isolated silo. Our students learn how all the fundamental areas of business (strategy, IT, organizational behavior, marketing, and communication) are necessary to making value maximizing financial decisions. As a result, we are training market participants and thought leaders who understand the complexity of these issues and are empowering students with a broad financial skill set to address and solve them.”

Professor Marston elaborates on how finance helps us to consider both the risk and return of potential decisions:

“Finance as a discipline helps hone critical thinking and analysis skills. It is important to study, as it offers ways to assess the viability of various opportunities by considering and modeling both the return and potential risk attributes. Essentially, all great ideas must be financed at some point!”

“Finance as a discipline helps hone critical thinking and analysis skills. It is important to study, as it offers ways to assess the viability of various opportunities by considering and modeling both the return and potential risk attributes. Essentially, all great ideas must be financed at some point!” –Professor Felicia Marston 

As you can see from the quotes in this post, the Finance Track professors at McIntire possess a breadth of knowledge on how their field affects personal investment decisions as well as business decisions. Finance is a foundational component to the understanding of commerce. Without it, businesses would not be able to operate, and valuation would not be possible. I have enjoyed the opportunity to hone technical financial skills in my classes throughout the year, as well as to create strategies to make strong business decisions and assumptions when information on how to proceed is lacking. Finance is a topic every person in business should strive to have an understanding of for decision making.

Learn more about the M.S. in Commerce Program and its track in Finance.

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