Debating the Value of the MBA. Again.

The business commentariat is abuzz of late, rehashing the old debate on the real value of the Masters of Business Administration degree. Slate’s “Big Money” insists that the “myth of business school has been exposed,” The New York Times advocates for the “retraining” of business school students, while The Wall Street Journal opines that the MBA degree might “just be another piece of paper.”   As “Big Money” asserts, oversupply is the culprit:  “Maybe it [the MBA degree] still had merit when the schools were turning out only a few thousand graduates per year.  But it certainly stopped making sense well before the schools achieved their current level of production, a whopping 140,000 or so graduates per year.”

As a student currently registered at Berkeley in the Haas School of Business program on Structured Greed, Negotiations in Gluttony, and Probability Modeling of Excess, perhaps I should take umbrage at having my “poor” choices in higher education so publicly exposed.  But my real gripe is this: the scribblings of these business “pundits” are a) neither novel nor profound, and b) suffer from an obvious confirmation bias.  Why business bloggers suddenly believe – and with such uniform timing!  Almost as if, say, they are doing their data-gathering from the same second-hand internet sources and/or rehashing each other’s work! – that the current crisis fundamentally calls into question the core business school curriculum is at best presumptuous, and at worst, poor research.

As a first point, there is nothing “new” to these observations:  Prospective students of professional programs have been performing cost/benefit analyses on their educational investment as long as professional degrees have existed.  A student can find a number of online worksheets that delineate salary upon entering Field X, expected salary upon graduation, savings growth, and hiring prospects – all generating a rough measure of that degree’s “value”.  (I myself used one of these in comparing the Chartered Financial Analyst (CFA) certification with the MBA degree.)  As far as soft-dollar value, for those wishing to change industry, function or geography, an MBA still serves as one of the ‘great erasers,’ deemphasizing past roles while underscoring new capabilities.

In regards to the second difficulty I have with these writers’ conclusions – selectively seeking out only confirming evidence — let’s start first with a discussion on the causes of this particular economic crisis.  Unquestionably the failure points are still up for debate, and likely won’t be agreed upon until the next investment bubble bounces along.  But for the purposes of my point, we can separate proximate causes from ultimate causes.  The proximate causes of this disaster involve financial concepts such as an overdose of yield-chasing, structured products and securitization.  Statistical concepts such as risk disaggregation and risk correlation can certainly be considered causes as well.  The ultimate causes of failure are much more opaque, however, and in all likelihood involve policy decisions and consumer behaviors in effect for three decades.

While these writers cite business schools as one of the failure nodes, they do not provide any serious analysis to back up this assertion. 

So let’s do a quick back-of-the envelope calculation using some of the numbers Slate throws out, those 140,000 business students that graduate annually.  How many of those 140,000 are actually affiliated with this mess?  Is it 30%  (the percentage of business school grads that typically ends up in finance) of 140,000, or 42,000?  Not even close.  The vast majority of MBA grads entering finance go into corporate finance, working in groups such as research and development finance, mergers and acquisition analytics, or cash management. In fact, these financiers are very often the ones buying complex derivatives and swaps from investment banks to hedge against foreign exchange and raw material price volatility.  As IRA, 401(k), and brokerage account holders, the general public should actually be very approving of corporations that hire such workers to control their earnings uncertainty.

The question we should be asking: of the 30% that choose finance as a career path, how many enter capital markets, and within that, how many end up in structured finance?  At Berkeley, even with its well-regarded program in financial engineering, one to two percent, or less than five students each year out of a graduating class of almost 250 full-time students, end up either building securitized time-bombs or trading them as part of a bank’s proprietary trading arm.  This percentage will be slightly higher the closer you get to New York, at venues such as Columbia Business School or New York University’s Stern School.  However, it will be considerably less – the majority of business schools send only a trickle of students into structured finance – at schools that do not have strong recruiting ties with alternative investment firms.  Blaming these few thousand graduates for this mess is equivalent to laying blame for the dot-com collapse on the computer scientist foot-soldiers.

As for a remodeling of American business education, it is grossly naïve to assert that the “standard” MBA curricula are responsible for this mess, or that an MBA is suddenly devalued.  Even the financial innovations that had a large part in the current crisis still represent a remarkable mechanism for distributing the returns generated from an investment back to those that bore its risk.  There is real value in statistically understanding the nature of risk, from case analyses to mastering quantitative risk management tools.  As Google Chief Economist, and Berkeley professor, Hal Varian recently noted, “I keep saying the sexy job in the next ten years will be statisticians. People think I’m joking, but who would’ve guessed that computer engineers would’ve been the sexy job of the 1990s?”  A chemical engineer, civil engineer, or socially responsible investor thinking big impact would be well-served to understand how structured finance can be applied to large projects.

Consider this tiny fact: a large percentage of the recent $800 billion fiscal spending package is targeted towards energy, physical infrastructure and healthcare, and MBAs are going to be very useful to a greater subset of workers.