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Does an MBA mean less profitability?

OK so I know this is heresy. An MBA is supposed to mean you are very sophisticated in business and of course you will make more profits right?

So how come all the MBAs, quants, and Nobel laureates in economics and finance in Wall Street almost capsized the Western financial system in 2008? And LTCM did it beforehand in 1998?

There’s evidence emerging from behavioral economics and finance research that strongly suggests that having an advanced degree in business or finance might be inversely correlated to making money. One of the reasons is over-confidence; if you are truly confident in your own ability – and who wouldn’t be with an MBA especially from an Ivy League institution? – then you tend to make worse decisions. Some of them occasionally end up leading to terrible results, as the world has just seen. And if you follow other people with Ivy League MBAs, things get even worse.

Our own research shows an inverse correlation between an advanced degree and business acumen. The higher the degree, the worse the outcome. Having a PhD is even worse. In our research only engineering degrees escaped this correlation, I have no idea why.

Don’t think this is credible? Check out the research by Zagorsky et al of Ohio State University that shows an inverse correlation between IQ and wealth creation at http://researchnews.osu.edu/archive/intlwlth.htm

It’s starting to look like an MBA will help you construct better numbers for your company, but that doesn’t reflect underlying wealth creation. In other words, an MBA will help you a lot with financial engineering and making your numbers look better. But it won’t do anything for you to actually create wealth. The reason for this are manifold and complex, maybe I will address this in another post sometime.

And you might even get a higher salary with an MBA but that doesn’t mean you created wealth either. In other words, studying for an MBA doesn't necessarily increase your business acumen, and might even reduce it.

The fundamental insight is that making money depends not on your financial or business literacy, but on your innate and learned behaviors. Unless you have them, or get them, no amount of business and financial literacy will lead you to create true wealth.

So in the meantime, tone it down with that MBA. Focus on your behaviors, not your knowledge. And if you have a higher degree, be very, very scared.

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Thursday, 21 September 2017

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