RIP, MBA

i think its not fair to blame this fiasco on MBAs only..i mean a major source of todays meltdown is Alan Grenspan, who presided over such a low interest rate regime that forced banks to take on excessive risks. you had Quant geeks (i went to school with many of them) and economists who totally didnt understand "risk" as one would if these quant quacks ever worked for NASA or bell labs. I mean wall street plucked a lot of these quant guys straight from school, and these kids never really put their engineering/mathematical skills to use in the real world where they could develop understanding of risks.

MBA has its uses, I wouldnt be applying to B-schools if there werent any benefits of getting an MBA training, but i think where we went wrong is to equate mba = leadership, regardless of that persons mantle.

The underlying causes for the mess we're in run far deeper than what business schools are teaching.

In fact, it's easy to target MBAs, executives, Wall Street, etc. but the thing is we are all to blame. It was the excesses of the prior era that we lived in, and that so many constituents bought into. I'll probably get off topic a bit here, but my main point in writing this is to explain why I don't think business schools alone should take any more blame than any other institution for the excesses of the last era.

The "every man for himself" mentality began in the Gold Rush of the late 19th century, and culminated in the excesses of the roaring 1920s. When that crashed and led to the disillusionment of unfettered capitalism and the "robber barons" (the bankers and the big families of that era - Carnegie, Morgan, Rockefeller, etc.), it ushered in a new era of collective responsibility. FDR's administration during the Great Depression was predicated on that -- that individual self-interest (capitalism) had to be balanced with collective responsibility (New Deal). Public/civic responsibility and big government played a big role from the 1930s to 1980. It's no accident that The Marshall Plan, The United Nations, The World Bank, NASA, etc. were byproducts from this time period.

Where this "balance between collective responsibility and individual self-interest" crumbled started with Watergate and ended with the Carter administration. While the postwar era up until Watergate saw FDR/Kennedy liberalism triumph (that government could do good and that we as a country could collectively do good - the whole "ask not what your country can do for you but what you can do for your country" mentality), those values crumbled starting with a misguided war (Vietnam), and climaxed with Watergate. It was a time of disillusionment with public institutions and by extension the idea that "we're all in this together." Around this time there was also an oil crisis that the gov't couldn't do anything about -- and the erosion of the idea of civic responsibility culminated in the election of Reagan and Thatcher.

1980 began a new era. The NIMBY (Not In My BackYard) economy or the "f*ck you" economy. Reagan best summed up the public sentiment and the era that he would usher in for the next 20+ years -- that government (and by extension the idea of collective responsibility) wasn't the solution, but part of the problem. It was a cynical knee jerk reaction to the erosion and scandal of the 1970s -- that the only way for a country (whether it's business, politics, community, etc.) is every man for himself. Screw public institutions. Screw collective responsibility. Let me mind my own business and you mind yours.

It was during these next 20 years (and Clinton was really more similar to Reagan than the classic liberals a la FDR or Kennedy) that was unlike the post-war era. Self-interest resulted in extraordinary growth and wealth creation -- and while the "trickle down" theory certainly did lift many boats, it was nevertheless skewed towards a minority -- but hey, when even the little guy was doing okay, no one was complaining about the NIMBY mentality. However, it was also during this time that we willingly (as voters and taxpayers) neglected public institutions in favor of self-interest. We want lower taxes, more individual wealth, higher stock prices, etc. but health care, education, and regulation would be victims we're willing to sacrifice for it.

If Watergate heralded the beginning of the end to post-war liberalism, 9/11 heralded the beginning of the end to the NIMBY era - and the nail in the coffin is our current financial crisis.

So it's easy to blame just one institution (business schools) for our ills, but the reality is it's a byproduct of the era we lived in from the 1980s onwards, which was a response to the failures of liberalism in the 1970s. Same with Wall Street, business executives, Republicans, Bush, etc -- we can blame all these people, but the fact is these institutions and people were byproducts of the era we lived in -- the underlying assumptions that we all lived by to some extent either religiously or tacitly by "playing along". We lived in a "greed is good" era and have only realized that "greed" isn't enough. With problems such as terrorism/extremism, climate change, health care, education, and the financial crisis, the sentiment now is that we can't just care about our own lot - that we are all in this together and that it will take a COLLECTIVE effort to solve our most pressing problems - both at the global as well as at the community level. That is where the public sentiment is right now, and is why we elected someone in office who seems driven to restore that balance between individual self-interest and collective responsibility. It wasn't "YES I CAN" but "YES WE CAN" that voters and the media really responded to.

The public outrage today over so many of the failed private and business institutions of the last 10 years is really a mirror image of the public outrage in the 1980s over the public and gov't institutions of the 1970s.

Just like we blamed public institutions for our ills 20+ years ago, we are now blaming free markets for our ills now. There's good in both, so let's hope that we don't throw out the baby with the bath water.

Unless business schools want to remain irrelevant in this new era, they would be wise to change their tune from "shareholder creation" to something more reflective of what this time period is about. In other words, they do have to change with the times.

It's one of the reasons why if the MBA is going to be relevant in this new era -- that they have to change their mantra from "leadership" (which bakes in so many assumptions of self-interest) to "teamwork" (which bakes in assumptions about contributing to something greater than the individual).

Let's be real. MBAs, like all businesses, value GREED, but call it something else like efficiency or profit. This is the main problem. "Greed is good" is secretly one the most common personal mantras of bankers all over the world.

Unless you specifically address the conflict of interest in valuing greed and at the same time pretending to teach ethics, you will always have huge problems when huge amounts of money are at stake. Any scenario where greed vs. ethics battle it out in a near tie, just double the amount of money at stake and greed wins.

The MBA application process doesn't work because the smartest people know how to craft an application to hide any ethical issues they might have in their personality.

What is the solution to this? I don't know.

I also disagree with the original quote. Of the big 3 grad schools (law, medicine, and business), MBA admissions relies on a standardized test score the LEAST. Have a look at the averages - people get into HBS all the time with 680's/690's (88%tile to 90 %tile), and the average GMAT at HBS is around 94 %tile. The average LSAT at Yale Law is 173, or 99%tile, and Harvard Law's is ~172, which is also about 99%tile. Good luck getting into one of those schools if you're in the 88 %tile.

If I've learned one thing from MBA applications so far, it's that it takes a whole lot more than a nice GMAT score to get into a top MBA program, and you can definitely get in without a stellar GMAT.

I actually believe that in some ways, this is the problem. GMAT is the only objective, equal-footing part of the application. Unless there is cheating on the test (admittedly, a real issue), you might get a group of people with better "ethics" on average by just taking the highest scores...

Certainly, and I feel this is a result of B-schools being way more interested in class diversity than law or medical schools. Since I'm neither a lawyer nor a doctor I can't comment on what a more diverse class may or may not bring to their respective schooling. But this makes me wonder, if anyone here had to say be operated on / or be defended in court for a capital murder you didn't commit, and you had to select your doctor or lawyer in advance solely based on various characteristics in their file (Grades, professional success, Scores etc etc), I get the idea your selection process would be a lot different than choosing someone to run a company you invested in. I definitely would care very little about how 'diverse' said doctor or lawyer's experiences had been! Business however is a different story, MBA's aren't just necessary because of how good they are in a specific domain, we have always been much more of a hybrid field that has evolved over time, and we are paid the big $$ because we've received an education/experience that makes us much more diverse, adaptable and flexible to rapidly changing situations than the average joe. So while I feel that while the c. 2005 MBA may be 'dying', I feel the author has attempted to pigeonhole a degree that historically is what it is because it dies out and re-spawns/re-invents itself.

From what I understand of the situation, the bulk of the complex derivatives that created this "financial maelstrom" were created by quants with PhDs, not MBAs.

The premise that the entire article is based on is completely false.

I think you summed it up really well Alex.

I don't think anybody's hands are clean in this (speaking in generalities here). Home owners bought more than they could afford because "hell, if they'll lend it to me, why not?" while lenders lent to people they knew shouldn't get the money because "hell, if my <company/gov't/boss> let's me, why not?".

I think very few people were out to cheat the system; most people saw others push the envelope and thought "why not me? I want a piece too!".

It's a kind of cultural shift that has been happening since the beginning of society, and you know what? It will happen again, but in a different form. That's just human nature.

RF

100% Agree.



Very interesting post and really made me think. It does seem like the importance of free markets and capitalism will be taken down a peg or two while government and the common good will increase in importance/prominence. What does that say for the future of business and business schools during the next generation? I saw Obama on Leno the other week and he said we neeed less of our best and brightest becoming investment bankers and more becoming teachers, doctors, engineers and scientists. Will business careers drop down the totem pole in terms of their importance/desirability? Will college students be looking towards careers outside of business? Will applications to law, medicine and the sciences go up will applications to business schools decline? I just get the feeling there are a lot of 20 year old college students out there that are very disenfranchised with the business world right now and I'm not so sure that the best and the brightest of that group will be interested in pursuing a corporate career.

Unfortunately MBAs have a bad history beyond the most recent incidents. Just look back at the Enron situation, you can see how deeply MBAs are entrenched in such huge and categorically fraudulent activity. Jeffrey Skilling HBS. Andy Fastow went to Kellogg. Robert Jaedicke, the chairman of the Andersen audit committee which oversaw the fraud, he is a former dean of Stanford GSB.

And is there a bigger douchebag in the world than Donald Trump?

Brings to mind the case of Nick Leeson and the Barings Bank in the 90s:

https://en.wikipedia.org/wiki/Nick_Leeson

In both cases (one deliberately, the other perhaps not so much) a small subset of an IB's whole operation ended up making decisions that severely paralyzed its operation. But like the MBAs at Baring deserve some censure for creating a system that let Nick Leeson do what he did, so too do the MBAs at AIG and Lehman who entrusted their companies futures to these quant PHd's without totally understanding/ignoring the potential repercussions.

As a scientist, I feel the need to comment.

Obama doesn't know what the hell he is talking about. The president might be the most powerful man in the world, but his power is minuscule in comparison to the market. Whether the president "thinks" we need more scientists, engineers, teacher and doctors is absolutely irrelevant. If the market needs more, it will get more and right now there are too many scientists. I can't comment about engineers, doctors and teachers.

I think the problem is people tend to have a very short-term view of things. You see news articles talking about our current economic crisis as if it's something new. This has happened times and time again (look up the Tulip Bubble of the 1630s or South Sea Company in 1730 or the Railway Mania of 1840). What we are going through is nothing new.

A free market economy is not inherently free of upheaval.

I think we need to educate people about the kind of system we live in. It seems like so many people think the "free lunch" exists. It doesn't. Somebody always pays.

We don't need to teach ethics, we need to teach how the free market works. There is the creation of wealth and there is the theft of wealth (by both gov't and private enterprise). If people fully understood the consequences of their decisions we wouldn't be in the mess we are today.

RF

I'm not trying to be mean and jump on you, but given that Alex posted a very intelligent and thoughtful post just before you, so this statement just jumps out even more.

It is precisely this kind of mentality that Alex was railing about. It is this "It's not my fault, it's the other person's fault" mentality that is causing problems in society, not just the financial world.

True, it is a math guru, David X. Li, that created the Gaussian copula function that is the main idea behind all these complex derivatives. However, it is the investors and traders that took that theory can actually made these complex derivatives, and many of these people have MBAs.

To *insinuate* that David X. Li is largely responsible for this crisis is like saying (to use some hyperbole) Alfred Nobel is responsible for 9/11 because he invented dynamite which led to the advent of other forms of explosives.

The Gaussian copula function is an idea, a theory which in of itself is not intrinsically able to cause much harm. However, you have people who don't fully understand the limitations of this idea trying to implement this in reality (your traders and investors, and even the ratings agencies), the quintessential example of a little knowledge being a very dangerous thing. You also have loan officers whose only financial incentive is to approve as many loans as possible to feed this demand for more mortgages. You have the insurance companies that blindly believe the triple-A ratings. You also have the people who know they have no business taking out a $500K loan/mortgage but doing so anyway. And at the very bottom, you have a society that implicitly, if not explicitly, approved this dysfunctional system. That's how you get into a mess this big.

It is not a problem where you can do finger pointing. True, a flawed theory deserves blame. The traders, investors, and rating agencies deserve blame. The insurance companies do too. So do the people who took ridiculous loans and are now trying to play the victim card. However, so do the people that like you and me that shrugged and said, "But it's not illegal," "This is just how capitalism work," etc. A problem this big tells us that it is a systemic problem, and not something you lay on the doors of a handful of people. Not just the Ph.D. quants, not just the irresponsible MBA or non-MBA traders, etc.

The premise of the article is not false, its conclusion however is.

He is a douchebag, but he's not an MBA. He has a bachelors degree from Wharton.

I agree with Alex and some other posters that the luster of a business career is likely going to diminish a bit over the next few years compared to the heady days of the 90s and earlier this decade. However, as the younger generation currently going through MBA programs or even younger than that begins to ascend into upper management, I think you'll also start to see the attitude of business start to shift to include a broader focus than just maximizing shareholder value, in order to better match this generation's views on the importance of social responsibility.

The bottom line is that the private sector will continue to be an incredibly effective mechanism for allocation of resources and creation of wealth and jobs. It would be foolish to constrain or ignore this because of the misdeeds of a few people.

Oops, sorry for taking it off topic. I got carried away...

Me too.

For anyone who wants to participate in a good ol' internet arguement, I've moved Alex and I's posts to....

RIP, MBA Part Deux

RF

I also think that part of the reason that MBA's get so much blame is that they are in prominent positions and easily identified with the crisis. Look at the crisis in education, as a counter example, the system is clearly broken, but there's no target that you can really blame. Teachers come from a variety of backgrounds, they have many different qualifications, and it is easily understood that they do not have the resources or influence to solve many of the problems at hand. Also, who do you blame if you decide to blame teachers? the head of the teacher's union? The same can be said for almost every link of the chain in that crisis. There isn't an easily identifiable target for our collective rage. The economic crisis makes it easy because people have "business" degrees, therefore they should know better. They're "Chief Executives" therefore they should be responsible for those below them, etc.