The man (with the hat) studying risk-taking and our changing use of money
Raghu Rau says he’s never had a life plan. His career has taken him from India to France and then from the USA to Cambridge. He’s fascinated by the ways in which financial markets are shaped by human experience — and how technology is opening up new routes.
I love hats — especially trilbies and fedoras. Trilbies have become part of who I am. The hat I’m wearing comes from Rome. I started wearing them well before the TV series Mad Men made them fashionable and it was rather annoying when people asked me if I got the idea from the series.
Cambridge can claim 98 Nobel Prize winners. But I’m one of only two Cambridge academics to have been awarded an Ig Nobel Prize — a scheme that describes itself “as honouring achievements that first make people laugh, and then make them think”.
My papers often have funny titles. I work for Cambridge Judge Business School (JBS) where my field is finance, something most people think of as deadly serious. The paper that got me the prize was called ‘What doesn’t kill you will only make you more risk-loving: early life disasters and CEO behavior’. It was published in the Journal of Finance — the leading academic journal in the finance community.
The research examined differences in risk-taking among CEOs. It looked specifically at company leaders and the effects of early exposure to natural disasters: how a brush with the forces of nature shapes the way we think and behave when it comes to making key decisions later in life.
The project stemmed from personal observations. After my PhD, I worked in the American mid-west. Each year the area was threatened by tornadoes. The first time I heard a tornado warning, I followed the protocols and sought immediate refuge in my cellar. After a few years, I became much more relaxed and ignored much of the advice. I was struck by how quickly I’d become blasé about taking risks.
It made me wonder whether risk taking is related to childhood experiences. I knew that CEOs who’d experienced the Great Depression, and felt its effects first-hand, were averse to taking risks — for example by taking on debts. But what about people who lived through the Depression but hadn’t suffered personally?
Natural disasters provide a powerful context. With colleagues, I identified 1,700 CEOs who, between the ages of five and 15, had lived within 100 miles of a natural disaster — such as an earthquake, hurricane, tornado, flood or landslide. Some had been directly affected — for example suffering property damage or experiencing the death of a friend — while others had not.
Dosage really matters. We found that those not directly affected took more risks as company leaders than those who had been directly affected — in other words, the level of negative experience has a lasting but non-linear impact on behaviour.
Human behaviour is fascinating — and underpins all financial markets. Why the financial world seems so impenetrable is because of the jargon that the finance industry has dreamed up, mostly to mystify the rest of us.
I’ve never had a life plan. I’ve just followed my interests and let things unfold. At school in India the subject I did best in was chemistry — so that’s the subject I studied at the University of Delhi. I decided to do an MBA because that’s what all my friends were doing. After that, I went to work for a state-owned company. We rolled in at 11am and left at 3pm — with a nice long break for lunch. I’m exaggerating but you get the picture.
Because I was bored, I volunteered for a task no-one wanted to do. It was checking 100,000 lines of someone else’s code — horribly tedious. I was asked to estimate how long it would take. I knew it would take just a few weeks but I said six months. But it was far less than the company had bargained for — other people had estimated it would take years. I won an award for completing the job superfast and on time.
A cousin suggested I did a PhD as it gives you the freedom to study something in real depth. I studied finance at INSEAD, a business school near Paris. I enjoyed being a doctoral student so much that I took six years to finish a PhD that should have taken four.
The way we use money is changing. For decades, finance was in the hands of big banks and regulated financial intermediaries. Now the tide has turned. An increasing number of firms are using fascinating new technology-driven models that allow investors and firms to cut out the intermediaries and do business directly with each other.
At JBS I co-founded the Cambridge Centre for Alternative Finance. We’re looking at the ways in which the finance sector has fragmented in the wake of the crash in 2008 and is making use of the new opportunities afforded by digital technology and social media. It’s exciting to be studying just how fast finance and management are being disrupted by technology.
Trust in banks has plummeted. We’re now seeing the advent of different routes for raising finance with the big banks taken right out of the equation. Using my phone, I can use an app to borrow money from another individual who will receive interest on their loan. Peer-to-peer lending is on the increase.
Firms are using our phone mobility data to gauge our credit-worthiness, offering loans on better terms if our phones show that friends on our contact lists don’t default, or if our phones are typically found in posh areas in London.
I feel really lucky to live and work in Cambridge. Its long history makes Cambridge special — so much has happened here and exciting work carries on today, sometimes in buildings centuries old.
I love showing people around. This year I must have given more than 40 informal tours for visiting academics. London is equidistant from Asia and the USA and I get visitors from both directions. I’m learning more all the time.
Raghu Rau’s book Short Introduction to Corporate Finance discusses finance through six basic ideas.
This profile is part of our This Cambridge Life series.