Sunday, April 05, 2009

Friends, Romans, greedy MBAs...

Elite business schools in the US are facing a backlash. What did you teach those stuffed shirts, anyway... Russian roulette??

Bloomberg's Oliver Staley reports: Harvard Business School, stung by criticism that it hasn’t prepared alumni to cope with the economic meltdown, will dissect its performance using a practice it employs to examine corporations in crisis.

A task force, created in November at the direction of the dean, is writing a case study to scrutinize whether the school is failing to teach students to understand and manage risk in the current environment, according to Paul Healy, co-chair of the panel. The case study method is the technique Harvard uses to analyze decision making by executives during times of duress.

The idea is to put professors in the students' seats and ultimately use the discussion to promote curriculum changes.

Harvard's less than illustrious alumni at the moment include the likes of Stanley O’Neal and John Thain (ex Merrill Lynch), Rick Wagoner, (ex General Motors Corp) and Christopher Cox, former chairman of the U.S. Securities and Exchange Commission.

The article goes on to add that "many of the graduates involved in failures attended the school 20 or 30 years ago, before classes on risk management, macroeconomics and leadership were required". But another Bloomberg columnist, Kevin Hassett, points out it's not so much what they studied but their attitude which resulted in the downfall.

And he makes such a good case that this is one of those rare instances where I am compelled to reproduce a large chunk of the article.

For two centuries, Wall Street survived wars, depressions, bank panics and terrorist attacks. Now Wall Street as we know it is dead. Gone.

When a healthy and thriving person dies suddenly, a medical examiner may talk to family and friends to see if the deceased had recently changed behavior in some way.

Wall Street did change radically in recent years in one notable way. Twenty or 30 years ago, it was common for the best and the brightest to be doctors or engineers. By the 2000s, they wanted to be investment bankers.

When Wall Street was run by people randomly selected from the population, it was able to survive everything. After the best and brightest took over, it died the first time real-estate prices dropped 20 percent.

Are the two facts related? In other words, did Harvard kill Wall Street?

Hassett goes on to argue that Wall Street is gone because its firms did a terrible job assessing the risks of the positions they took.

The models these firms used to evaluate risks failed. But having a failed model brings a firm down only if the firm collectively buys into the model. To do that, the firm must be run by people who have a great deal of faith in their models, and a great deal of faith in themselves.

So basically, MBAs believe they know everything, that they can do no wrong. This narcissism has a real career impact...

The consequences of Wall Street’s reckless brilliance in many ways parallel modern-day engineering disasters. If you travel through Italy, you can’t help but notice the many Roman bridges that still stretch across that nation’s waterways. How is it that the Romans could build bridges that would last thousands of years, while the ones we build today collapse after a few decades?

The answer is simple. Back then, they did not have the fancy computers required to calculate exactly how strong a bridge must be. So an architect made a bridge very, very strong. Today, engineers can calculate exactly how much steel they need to incorporate into a bridge to bear the expected load. The result is, they are free to make them weaker...

The same is true of the financial sector. Back when Wall Street was run by individuals without fancy degrees, they had a proper skepticism toward fancy models and managed their risks with a great deal more humility and caution. Only when failed models became canon did catastrophe strike.

He concludes: Wall Street didn’t die in spite of being run by our best and brightest. It died because of that fact.

Ahem. I don't agree with this entirely - the regulators who turned a blind eye and allowed the is good' brigade to take over are also to blame. But yes, there is much in what he says that rings true.

Every catastrophe has its lessons (one hopes!). Here is some more food for thought for bschools and their students from columnist Matthew Lynn (also from Bloomberg!)

A sum up: Business schools legitimized a pseudo-scientific approach, promoted a mechanistic management style and formed a managerial elite more interested in rewards than producing lasting wealth for the economies they operate in.

(An attitude which manifests right from the time of placement, I would add!)

But the details are more interesting, so here goes:

If a flight-training school produced this number of crashes, we would be asking some questions. There is no reason that business studies should be exempt from the same kind of scrutiny.The schools should be called to account for several things.

First, they encouraged a quasi-scientific approach to business, sermonizing that everything could be nailed down in a textbook. By preaching a set series of formulas they encouraged students to believe that running a company could be mastered by anyone. The entire private-equity industry is founded on that principle. So are mergers and acquisitions.

In reality, management is a skill that is acquired through experience, judgment and flair. Billions are about to be wasted relearning a simple fact that should never have been forgotten.

Second, the intellectual tools that led us into the financial meltdown were largely invented within academia. Complex models for pricing risk created the market for the options and derivatives contracts that have caused so much trouble in the past year.

The business schools took something that was mysterious and unknowable -- risk -- and tried to make it as easy to count as peas in a pod. By doing so, they encouraged a whole generation of young men and women to go into investment banking armed with the belief that they had mastered risk, that it had been tamed and brought under control.

The truth, of course, turned out to be different. Bankers can no more tame risk than sailors can tame the oceans. All they can hope to do is steer a safe course through it.

Third, the schools created a managerial elite that acted like a caste apart. One reason the bonus culture ran out of control was that many of the people involved were trapped in a bubble. They thought “guaranteed” bonuses, private jets and multimillion-dollar payoffs were normal. That process started in business schools.

Citing examples from history such as Henry VIII and Fidel Castro, Lynn makes a rather drastic proposal: Shut down business schools. They are beyond redemption.

Not that yeh honewala hai. Just arbit emotional CP. But for a moment, if we were to say that an ordinance was passed to shut down bschools across the world. What would happen?

Nothing. They would just spring up in another form. They might teach anything, anywhere, but ultimately we would find a new way to create elites, who believe they are the brighest and best, and can do no wrong.

We will bring down other walls on other streets. But keep building more... to separate Purebloods and Mudbloods, Brahmins and non-Brahmins, Thinkers and Followers, ... 'Us' and 'Them'.


  1. RashmiJi, a better alternative to tinyurl is

  2. "...the regulators who turned a blind eye and allowed the is good' brigade to take over are also to blame..."

    what are these people? kids? I wonder how the same people who'd have screamed their gut out a couple of year ago if govt had tried to restrict this gamble.

    The same people who claims that govt is run by morons at best and hardly have the IQ to understand how market should behave.

    That the markets are and should be self regulating.

    and now when they mess up huge, they want everyone to share the blame :O

    The truth is the that this havoc is caused not by ambition but naked greed of people who thought that they know everything and anyone how disagree with them are stupids and enemy of mankind.

    That you have to achieve YoY/QoQ growth irrespective of the means lead us to an era where we have a bar of soap weighing 100 grams in one year followed by 96 grams in next year and may be 90 in next.

    That you can fit a "side-middle" in a three tier AC coach and make it more cramped than a 3-tier sleeper coach.

    That you can lend money to an abyss of a person, pocket a huge commission, then get rid of any risk by "packaging" the loan as "investment" and sell it to the moron on the other side of the world who have no idea of the original person who has taken the loan.

    That you can do anything as long as it cannot be proved illegal or can pass through a loophole.

    Weren't these "best and brightest" supposed and claimed to know better?

    It's time that the BS (pun intended) starts introducing a mandatory "moral science" credit in their curriculum.

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  4. Very thoughtful and pretty interesting. Not to mention many thanks for all the links.

    You had cut down on long and insightful posts for a long time. Its really good to see them back.

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  6. Rashmi, I have been a regular reader of your blog for a long time now and this is the first time I was 'thought provoked' to comment.

    Your article reminded me about the parallel of Wall Street with the Australian Cricket team.

    In the hey days when Australia were winning everything, there were some theories that, "fringe Test and domestic cricketers should be allowed to play for rival nations to strengthen competition". Only Shane Warne had the foresight, and I quote "The only issue that I have got with cricket at the moment is that Australian people and administrators and ex-players and ex-coaches, a la John Buchanan, have got to stop the arrogant mindset that Australia is so much better than anybody else."

    "Yes, Australia is the No. 1 country in the world but all this bullshit about our players going to other countries and playing, what a lot of crap."

    "There is going to be a time in the next two or three years when Australia is tested. Other countries will catch up and they will unearth someone, that's just the cycle, as long as their foundations in those countries are strong."

    Similarly, the head honchos at Wall Street were so full of themselves during the boom period that they forgot that one can't win forever.

    Today they are in the same uncomfortable position that the Australian Team are in, that is, being questioned by persons they would have considered totally insequential just a few years ago.

    In Australia's case it is India and South Africa and in the case of Wall Street, it is the opinion of the common man and the US Govermnent.


  7. >>> the regulators who turned a blind eye and allowed the is good' brigade to take over are also to blame.

    and from where these regulators come from? they were also same people who thought they were best and brightest. so in the end its BS brigade only who is responsible for all stinky BS on WS.

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  9. Hi,

    As a poor little arts graduate who did his MBA with a class that was predominantly full of engineers, and that too IIT rankers and sundry other such alpha male achievers, I have to differ on this one. The bloomberg columnist gets one thing right, the big thing about an MBA is the attitude. This is something even I understood, within a few months of the grind.
    However, the big question is how this attitude helps us. It is, I feel, intended to help us by embracing challenges a lot of other people would consider difficult, to improve tasks and leave our 'mark' so to say, where someone else is happy with the status quo.
    That it all went horribly wrong in case of Wall Street is explained by reasons well beyond blaming a management degree.
    I still remember the sheer embarassment of discovering during my summer training with an FMCG company that my travel entitlements were better than a sales officer who had worked with the firm for over 15 years. I chose to get over it by making a really major effort to have something to show for the huge difference. I am not at all saying that this sort of difference was valid, but it did force me to work outside my skin to make a point to myself, and yes, to the sales officer of possible.

    And yes, one wishes that so called premier MBA's would do their reputation a huge favour by stepping up and taking repsonsibility when things go wrong. We would all be a little more proud of our superior status if we knew that our tribe is always the first to do that too. And the world knows it.

  10. An awesome article and a very realistic and relevant post

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  12. Realistic one... and nicely put up after all Angels blog it is always the best.

    However I will like to put the other view as well. Don't you think that world now a days easily put the blame on the MBA's. If we expect good salary, they call it greed. IF we falter somewhere they call it incapability. If we fail to anticipate something, the teachings at School are blamed.

    I mean how come MBA's can be at fault every time. Are we saying that MBA's are the ones who are taking all the decisions... managing everything... driving all the changes...
    To some extent YES!!! still the blame should not come to a particular group always.

    I do agree that we have committed mistakes however everyone do commit... The overall scenario is still gloomy and so vastly that it is always easier to point fingers and carry on minimum shit... However I strongly believe that if something fails, people should divide those blessings (coming as disguise) as well...

    ( No offense however this is coming straight from the heart of MBA grad of class of '09 with more than 5 years of prior experience and we know what and how much this batch is suffered due to meltdown :D)


    Forget Bloomberg and all, we have our own "bright" future PM Rahul gandhi, lying about his education

  14. there r a set of approaches that ppl learn to conceive and implement when they grow.Does that mean that the business schools,colleges and primary schools ppl study in have an accountability towards them and the approaches adopted by them to tackle difficulties? So every wrong decision taken by a mba or an engineer can be traced to the inability of b schools or engineering colleges to teach them to be open minded and sceptical of academics.looking forward to your views on that!!

  15. welcome back! hope to hear more from you!!

  16. I understand the mentality to over analyze after a goof up. But this has gone over the roof.

  17. Rashmi, understand your perspective. Example of roman bridges make sense as nowadays, executives only do so much which is required..Nothing more.. Moreover, it is very well said that "In reality, management is a skill that is acquired through experience, judgment and flair".

  18. You could have avoided the "Brahmin vs. non-Brahmin" comparison. The Brahmins have had enough flak already

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