Peter M. DeMarzo

For Peter DeMarzo, it’s all about the moment when the light bulb goes off — either in his head, or in someone else’s.

An economist with a passion for finance, DeMarzo has conducted research on corporate investment, market regulation, and sovereign debt. But he is also a dedicated teacher with a commitment to blending theory with practice: DeMarzo introduced financial modeling to the Stanford Graduate School of Business curriculum; co-wrote two popular textbooks, Corporate Finance and Fundamentals of Corporate Finance, with fellow Stanford GSB professor Jonathan Berk; and launched Stanford LEAD, the school’s flagship online executive program.

As it turns out, both aspects of his career are rooted in the thrill of discovery: DeMarzo loves nothing more than learning new things and helping others do the same. As the following conversation shows, the urge to both experience and share “aha” moments has shaped his entire life.

How did you initially wind up at Stanford?

I grew up in New York and went to UC San Diego for undergrad. I got really interested in cognitive science; my undergraduate thesis was on learning in neural networks. But I thought it would be 40 years before any of this could actually be done. And I was impatient; I didn’t want to wait around.

Stanford had an Institute for Mathematical Studies in the Social Sciences, where you could do an interdisciplinary PhD. And I thought that sounded really cool, especially for someone who didn’t know exactly what they wanted to do.

How did you settle on economics?

My first Stanford advisor was supposed to be Amos Tversky. He was doing research with Daniel Kahneman that seemed really interesting and exciting. [Kahneman won the 2002 Nobel Memorial Prize in Economic Sciences for his work with Tversky on decision-making.] But he went on leave, so I got reassigned to Kenneth Arrow. [Arrow won the 1972 Nobel in economics.]

I went to meet with Ken and said, “I’m interested in different applied topics and I don’t know what I want to do; can you give me some advice?” He said, “If you’re interested in economics, you have to go over to the business school and meet Bob Wilson.” [Wilson won the 2020 Nobel in economics.]

So within my first month and a half at Stanford, I’d had interactions with Amos Tversky, Ken Arrow, and Bob Wilson, all doing Nobel Prize-winning work. It was a uniquely Stanford thing; I look back on it, and I think, where else could this have happened?

I ended up talking with Wilson, taking some economics, and thinking: This is a great combination of quantitative modeling, which I really enjoyed, together with a social science application, which is what I was really craving. That’s why I made the decision to switch to economics.

The mid-’80s was also the golden age of economic theory, and it was all happening at Stanford; so many of the field’s defining ideas — and the people driving them — were right here. It was like walking into Florence in the middle of the Renaissance.

As an economist, what drew you to finance — and to business schools?

Finance is a great field: There’s a lot of data, and it’s very market-driven. So it’s a nice laboratory for thinking about lots of interesting questions.

My dissertation was on the border between economics and finance, and when I went on the job market, I got job offers from both economics departments and business schools. So I had to make a decision: economics, or business schools and finance?

One reason I picked a business school was that I cared a lot about teaching, and I knew they did, too. So I thought, I’m going to work hard at that; I might as well be someplace that values it.

Why is teaching important to you?

There are two amazing things about the job I have: one is the discovery piece, where you do research and discover something and have that feeling of being the first person who’s ever figured this out. And then the next thing is, how do I communicate that and get the light bulb to go off in someone else’s mind? It’s so thrilling when that happens; I thrive on that.

What about the research side? What are you currently excited about?

Lately, I’ve been focused on the stability of the banking system — including what went wrong at Silicon Valley Bank and First Republic in 2023. What makes it especially interesting is how the failures combined regulatory shortcomings with business-decision mistakes.

And it’s not just banks. Advanced economies are running unprecedented deficits, and sovereign debt has surged to levels that raise real questions about long-run sustainability.

On a different theme, Jonathan Berk and I are studying why investment-management contracts differ so sharply between public markets, like mutual funds, and private equity. One key distinction is the greater need for investor due diligence when the underlying assets are less liquid, as in private equity — and the way contracts are designed to reward investors for doing that work.

I’m also excited about launching the new Initiative for Investing, which brings together faculty and researchers with our incredible alumni base and our students. The GSB has an enormous footprint in investing: Our alumni have been leaders in all asset classes, around the globe, from private equity to hedge funds to real estate. And yet, if you ask people what the GSB is known for, they say entrepreneurship. Which is great — we should be known for that. But we should be known for investing, too. That’s a big part of our legacy.

So the goal of this initiative is to change that and say, “If you want to lead the industry and create what’s next in finance, come to the GSB.”

After getting your PhD, you taught at Northwestern University’s Kellogg School of Management and UC Berkeley’s Haas School of Business. What was it like returning to Stanford in 2000?

It was great to be back here. But I felt like things had gotten a little bit rigid. Stanford was so successful, and nobody was sure why, so everyone was afraid to change anything.

Did you try to shake things up?

I did. One of the things I pushed for was to create a studio where we could produce high-quality video, because my goal was to launch an online program.

Massive open online courses were just starting. But I didn’t have a lot of confidence in MOOCs, because what makes the GSB special is that it’s a transformative learning journey, and that’s not just about throwing a bunch of videos online. So I said, “Let’s think about how a one-year online program could be simultaneously global and online yet intimate and transformative.” That was the goal for LEAD.

I also wrote a textbook to shake up the way finance was taught. I wanted to write a book that would match practice and combine it with theory. That was missing. We needed something that brought it all together.

In finance, a lot of things that sound right are actually wrong. The challenge is learning to tell the difference — and that takes understanding the “why,” not just the “how.”

You also developed the school’s first course in financial modeling.

Financial modeling is very practical; I thought there was an opportunity here, because for me it’s always about theory plus practice. We do real applications: a real M&A, a real leveraged buyout. It’s about understanding the risks and the things you really need to pay attention to: What is going to make this a good deal, and what can make it a bad deal?

But I also emphasize that financial models are just tools, and that at the end of the day, no one cares about your model; they care about how you communicate it.

So the secret of the class, which the students don’t even realize until they’re done, is that every week they build a model; but they also build a presentation, which is how they would communicate the model to an investment committee. And that presentation is the true output, because the model is just a way to understand and internalize what’s going on. The real output is the story that you tell based upon the model.

That’s a key part of leadership: being able to communicate in a way that will bring other people on board. The ultimate goal of the course is to teach people how to do that.

By the time you became interim dean, you had spent nearly three decades at Stanford GSB: as a student, a faculty member, and an administrator. Was there anything about being dean that was novel?

It was definitely an opportunity to engage in a much more concrete way in two dimensions.

One was with our alumni, who love the school and are so devoted to it. It’s wonderful to be able to absorb that energy.

And the other is that we run a very complicated organization. The staff side of it is incredible, and it’s great to be able to lead that team. That’s something I felt very honored and privileged to do.

A lot of your daily life as an academic professor is pretty solitary, whereas being dean is not at all solitary: You’re trying to help the whole organization move together. And that’s truly inspiring.

Photos by Nancy Rothstein