The value of an MBA

In the previous post about the clown’s wife who has a state school MBA, there was a discussion in the comments about the value of an MBA. This is a topic I don’t think I’ve written about before, even though it seems like something I should have written about before.

Unlike a law degree, which is looked upon with suspicion if you don’t actually use it to practice law (and the same probably applies to other weird degrees, such as a PhD in Philosophy), the MBA is always viewed as a plus factor in the business world. A plus factor means that no one will hire you because you have the credential, but it’s looked at favorably when you are compared to candidates who don’t have it, especially if you are looking to get promoted to management. But keep in mind that it’s a small plus factor and not a huge plus factor.

The exception is if you earn an MBA from a very prestigious business school such as Wharton, Harvard, Stanford, or Columbia. People will hire you because you have such an MBA, and you can get hired into a prestigious and high paying investment banking, hedge fund, or management consulting career track.

If you can get accepted into a top MBA program, such as the four schools mentioned above, you should definitely borrow all the money it takes to pay for the education. On the other hand, it’s not worth borrowing a huge amount of money and taking off two years from work in order to get an MBA from a run-of-the mill school.

You never see me complaining much about my MBA because I didn’t give up much in order to get it. It was an evening program at Arizona State University, so I didn’t have to give up my job in order to obtain it. The work was really easy, so I didn’t have to study too hard. The tuition was inexpensive state school tuition and not expensive private school tuition. (One should note that evening MBA programs are very common, while evening law school programs are pretty rare. This is because law school is way too difficult to do simultaneously with working full time, unless it's stretched out over a long time. NYU has an evening LL.M. in Taxation program that stretches out over three years. In comparison, my evening MBA program at ASU was only two years, the same length of time as the day program.)

As a plus factor in non-prestigious career tracks, no one cares very much if the MBA was an evening program or a day program. So my advice is that if you can’t get into a prestigious program, do the least expensive evening MBA program that you can find. The exception, perhaps, is if you live in New York City, and you have the option of doing the evening program at the Stern School of Business at NYU. Maybe this is prestigious enough to justify NYU’s very expensive tuition? I have to think about that. The day program at Stern will be more likely to get you hired into a prestigious career track, but Stern is a big step down in prestige from Columbia, so I also have to think about whether Stern is worth it if you get rejected from Columbia. (Of course, if your parents are willing to pay for your education, you should take whatever education they're willing to fund. Parents seldom give their twenty-something children the choice between an education and a $100,000 check, so between fully funded education and nothing, fully funded education is a great deal.)

Zillions of people in the business world have an MBA, and because anyone can get one, it doesn’t necessarily prove that the holder knows anything. I said before that it’s a plus factor, but if I were interviewing someone for a job, and they had an MBA on their resume, I’d ask them some basic questions that someone with an MBA ought to know, such as “explain net present value” or “explain depreciation.” A former manager of mine, who had an MBA, didn’t know what depreciation was. This is very pathetic in my opinion. She ought to have her degree taken away from her.

Comments

[Peter]

Back in my college days, which were so long ago that humans hadn't yet fully evolved opposable thumbs, some of the faculty members in the economics department were suggesting that students interested in getting MBA's (a high percentage of the department's majors) should consider masters' degrees in economics as an alternative. Whether this was self-serving, or whether an Econ MS really is a better degree, I couldn't say. Come of think of it, would many prospective MBA students even have the quantitative skills to manage an Econ MS?

Separately, I've heard that if one is to get an MBA from a run-of-the-mill school, the best bet is to get one with a concentration in accounting. These tend to be more marketable than ones which focus on finance or marketing.

[Peter]

Depreciation is the loss of value capital experiences by the passing of time. For example, a woman's value is highest at 16, and slowly depreciates until at 35 it reaches zero and becomes a liability.

A classic Gannonesque analogy.

I'd like to match that in cleverness, by defining net present value in terms of the Glorious Natural Pelt, but alas nothing comes to mind.

[Cameron]

I agree that accounting is a better degree if you find it interesting. Many business students can't stand accounting.

[janes'_kid]

I once worked for a corporation that encouraged a bunch of programmers to go get MBAs at the University of Phoenix. That corporation was going broke and sold out to another large corporation. The purchasing corporation made all the programmers with MBAs take down the credentials from their cubicle walls.

[DF]

"Come of think of it, would many prospective MBA students even have the quantitative skills to manage an Econ MS?"

No. While there are many MBA programs that are starting to offer financial engineering electives for the mathematically inclined, the vast majority of MBAs don't know their way around a partial differential equation because its not part of a typical MBA curriculum nor was it ever knowledge acquired by most of the students while undergraduates. Interestingly enough finance, has become more quantitative over the last 30 years and perhaps more so in the last 10. There are degree programs starting to pop up that focus on this demand but Wall Street continues to recruit PhDs especially for research and trading of derivatives.

[Peter]

I once worked for a corporation that encouraged a bunch of programmers to go get MBAs at the University of Phoenix. That corporation was going broke and sold out to another large corporation. The purchasing corporation made all the programmers with MBAs take down the credentials from their cubicle walls.

What exactly is the value of a University of Phoenix degree? Do employers regard them as legitimate degrees? The whole concept seems a bit dubious to me, but on the other hand the company is thriving like crazy.

[cuchulainn]

Depreciation is an abstract enough concept. It might be difficult to explain what it REALLY is if you're just put on the spot. Still, you'd expect her to say something like 'the wear and tear on a fixed asset over time'. This is what most people would say, but is technically incorrect, as depreciation only exists as an accounting concept. Its purpose is not to compute by how much a fixed asset wears down from year to year, which is impossible to do with precision, but to SPREAD OUT THE COST of the asset over a number of years. Say you buy a fixed asset in 2002 for $500,000. If you immediately expensed that $500,000 it would seriously affect your profits for that year, probably making them VERY negative. So instead you SPREAD OUT that cost over a number of years, by expensing only a certain percentage of it each year. The main point of it is to not mess up your net profit figure in the year of purchase and beyond, so the full cost and benefit is spread.

[Rain And]

Of course, if your parents are willing to pay for your education, you should take whatever education they're willing to fund... between fully funded education and nothing, fully funded education is a great deal.

This is really bad advice, because those 3 to 5 years lost in earning a worthless degree could have been spent earning $100k or more in the labor market (even at minimum wage).

[SteveBrooklineMA]

Interesting to see this perspective from someone with an MBA. I've always found the whole degree suspect. Finance without math? Information Systems without programming or hardware knowledge? Please. Pay your tuition, show up to class, collect your merit badge. As for the elite schools, how much of the benefit is in the form of education and how much is simply getting hooked into the "old boy network?"

[Mr. Mercy Vetsel]

HS is dead-on in his take on business school, although I'm a bit of a bigger fan of the degree than he. I was a skeptic, but actually going to B-school turned me around completely. The MBA is the perfect blend of theory and practice and I can't think of any other degree that better equips people to understand the real world we inhabit full of companies, finances and marketing. Everyone should get an MBA.

+ You learn how to do statistics including linear regression and financial modeling, but in Excel and Crystal Ball not MatLab.

+ You learn psychology in the context of competitive strategy and marketing.

You learn enough corporate finance and accounting to understand the language of business.

You learn enough economics to appreciate the application of rigorous thinking to the social sciences.

Since an MBA doesn't qualify you for any state-sanctioned monopoly you should, as HS suggested, get an MBA from one of the very top schools. Also, I think people benefit more from an MBA once they are out of school for 5 to 10 years.

To that end I would also recommend the Executive MBA programs. Typically you keep working and then spend about 9 hours in class every other Friday and Saturday year round.

Columbia and Wharton both offer very solid executive-format MBA programs and while there is a false perception that an executive MBA is less rigorous like an executive Summary, it's actually better than the regular program. It's the same degree, the same 60 credits and the same coursework (at least at Columbia and Wharton), but the professors are better and the interaction with fellow classmates benefits from their greater experience and career exposure.

At $130K, the price is a bit steep, but if you can make an arrangement with your employer to sponsor you in exchange for a gross-equivalent reduction in your bonus, the total out-of-pocket price becomes $70K due to tax savings. Even for non-sponsored student tax savings are easier to pull off if you're working while you obtain the degree.

I think a Masters in Economics, Finance, Marketing or Accounting is a good option for new graduates or for people who can't attend go into a top school or who can't find a convenient evening program. A regular Masters degree is normally only 30 credits, while an MBA is 60.

-Mercy

[fang]

Intuitively, I agree with HS's view that kids should say yes to whatever expensive education parents are willing to fund. But Rain And mentioned that the opportunity cost is at least $100k. So which is more valuable? $100k + of wages, or the payoff from a free MBA? (say from a regular school, which only amounts to a 'plus factor'.)

[nobody]

This topic has been extensively covered by other bloggers. The conclusion was that the real value of the MBA is that it allows one to make connections and get to know the future deal makers. This is why it is prestige matters. You can't exactly do that at ASU. (Not suggesting that ASU grads can't be big shots locally)

The classroom work is probably of questionable value. All these marketing, basic finance, etc should be and can be learned at the undergrad level. The so called "practice" is no better than what we see in the Apprentice TV show.

[Mr. Mercy Vetsel]

The classroom work is probably of questionable value. All these marketing, basic finance, etc should be and can be learned at the undergrad level.

Wrong.

I suppose in a certain extent most classroom work is of questionable value. All professionals learn most of their profession after they graduate. I would wager than MBA coursework provides more useful and generally applicable knowledge than any other professional degree.

And, personally, I don't think accounting, corporate finance and marketing should be part of the undergrad core curriculum. Why bother having undergrad degrees at all if everyone's just rushing straight into a career?

Smart people shouldn't already know what they want to do with their lives when they're 17.

-Mercy

[AnonymousMBA]

Just like with law schools, there are a few MBA programs that actually make a difference to the career of the enrollee. The usual suspects are Stanford, Harvard, Columbia, Wharton, Chicago, Kellogg, MIT, Michigan, Tuck , with some discussion around Stern, Duke, Darden, UCLA and Berkley. The top schools are very selective (avg GMAT ~95th percentile of takers, which are already college educated). However, unlike law schools, which are a default choice for people with no idea what to do after undergrad, the top b-school require 2 years of work, and the average is 5. This makes for a more mature, self-selected crowd that really wants to be there and values the network created (vs. law school animosities). The only competition exists for summer internships. But it is unheard of people destroying class notes in the library if the other student goes to the bathroom without packing up. B-schools actually require teamwork, and do a good job at building camaraderie.

The academics/knowledge is more secondary than most outsiders think: no school has monopoly on knowledge, and we are not talking particulate physics or neuroscience here. What makes a difference is the size and strength of the class (your network) and the career ops out of school.

If you just look at the career placement stats by company that the schools publish. It really is a tale of haves/have-nots. The top firms recruit only at top schools, period. Just like Sullivan&Cromwell goes only to Harvard Law and Yale Law, McKinsey goes only to select few. It is much harder to get in from outside the "core" schools.
Here is what a report from a top school looks like:
http://www4.gsb.columbia.edu/ipimages/publications/CBS_Employment%20Report-Final.pdf

There is a list on page 21. Of course, 2007 was a top-of-the-bubble year. But even people that graduated in '02 and '03 have done well in retrospect.

[Bobby]

I graduted from an SEC school and I am looking to get an MBA from Southern Miss...

I could have went to Dartmouth on a football scolly but I had my mind on the NFL.. ( I am not in the NFL)

Yeah, the IVYs = MONEY but any other MBA is trash... I use to work in human resource when I was like 24( I am 25 now) and I seen so many people with MBAs from some solid schools like UNC Chapel-Hill and they never had decent employment... Now if you can get a goverment gig or working for the military with an MBA you can get boosted up some pay grades and earn some decent jack....

If you are young and you have a young wife, and your both able to get GS-12 positions with the government.. You will have a cake job and two fridays off per month so you will both bank around 20K per month in income and with a job witht he Air Force or Navy you know you wont have to worry about lay offs