In a December 3rd blog post, The Economist.com comments on the role of MBAs on the financial crisis. It is well-known that applications to graduate school soar when the economy falters, but Andrew Lo from MIT and Jay Lorsch and Rakesh Khurana from Harvard have debated on a BusinessWeek forum whether "business schools are actually to blame for our current turmoil." Lorsch and Khurana blame b-schools for their "failure to promote a higher cause", while Lo asserts that "the current crisis highlights the growing complexity of the financial system and underscores the sea change in business education from the generic to the specific".
He has a point; however, the move toward specific, detailed knowledge, required by the increasing complexity of financial instruments - which many on Wall Street did not understand, as the crisis has demonstrated - also suggests an upcoming separation of the trainings for finance careers and for general, management ones. The case studies of b-school help students understand various issues and dilemmas before they are faced with similar situations in real life; to be an effective CEO, there is, after all, no better training than doing. A thriving career in finance nowadays is based on an in-depth grasp of quantitative concepts, while many MBAs stop as standard deviation when they look for a risk measure. Of course, few MBAs become quants (part of the blame for the crisis has also been placed on computer models the quants used, with assumptions that turned very wrong) - but they supervise them.
According to the Economist.com, Lo believes "MBA students can learn the tools commonly used in modern finance while learning how to model and balance risk properly." That is hardly enough. MBA training could become stronger in quantitative methods (in the current state of things, some MBA training offers better quantitative training than others), but the real question is: have MBA programs outlasted their usefulness when it comes to training students for finance careers? The ascent of Master of Science programs in Financial Engineering suggests they have. These programs are, for the most part, relatively new, and as more and more graduates get promoted to supervising positions, more management jobs on Wall Street will be occupied by math-savvy financial engineers. (This obviously won't solve all possible problems. The current crisis also suggests an upcoming boom in continuing education courses for financiers, since many concepts have emerged over the past decade.) MBA programs do offer valuable courses in the management of organizations. But when it comes to finance, the MBA degree has lost its cachet. It is time for more specialized programs to take over.
Happy New Year, everybody! Best wishes for 2009.