Thursday, August 21, 2008

What is an MBA worth?

US Economics undergraduate majors typically take four directions: straight to a job, to Law School, to Economics graduate studies or to an MBA (usually after a few years on the job). Law schools have proliferated and produced a glut of students which is clearly leading to starting wages that do not justify the cost of studies. Is it then worth taking on an MBA as an alternative?

Peter Arcidiacono, Jane Cooley and Andrew Hussey tackle this question with data from the GMAT, the standard test used to select MBA candidates. What is particularly interesting in this data is that it contains students that did not pursue the MBA, as well as what potential students were earning at the time they were taking the test and after studies.

So what is an MBA worth? A raw regression with few controls gives a return of 9.4% for men and 10.4% for women. Add controls for ability, returns drop to 6.3% and 6.7%. Or use fixed effects, and returns are only 4.8% and 3.8%. These numbers are truly not impressive given cost and supposed prestige of those programs. Which begs the question: are all MBA programs equally valuable?

For a school ranked outside the top 25, a full-time or part-time MBA program is essentially useless, in particular after controlling for ability. Executive programs have a return in the order of 11%. Going to a program ranked 11-25 increases returns by 27% (men) and 14% (women). Go to a top 10 school, and you can add another 6% or 28%.

Remember where the data comes from: people who took the GMAT and some decided not to go for an MBA. Is it because they realized they where not getting into a top school, so they skipped the MBA entirely, thereby making essentially the same return as those going to a lower ranked school? I call this an indifference point between going to school or not. So at the margin, going to a school outside the top 25 or not is equivalent.

What I conclude from this? Most MBA programs are not worth the time. Only the top programs give significant returns. This implies also that the top programs will continue to attract students without bounds. Harvard now graduates about 900 MBAs a year...

13 comments:

Vilfredo said...

This pretty much confirms what we already knew: business schools are a sham that just entertains their students. The fact that top schools have a higher return is just the result of the entry selection process, that is, the schools certified who the best candidates were. What they learn thereafter is irrelevant.

brent g. said...

Vilfredo, the top schools still come ahead after controlling for observed characteristics like GMAT scores. This means that these schools manage to determine which candidates are better according to some unobserved characterists, or they really teach them something useful.

hubertus humperding said...

MBAs have always been overrated. Executive MBAs also do not learn much, but they gain some serious networking. But the latter can also be dome on a golf course.

Ekonomix said...

the return for top 25 schools is 25+%. this proves the point. Why do you include stupid schools which pretend that they have an MBA program?

Ekonomix
http://turkeconomy.blogspot.com/

Independent Accountant said...

I suspect you will find much the same thing for law schools.

Anonymous said...

There have been many ROI analyses completed on this question. Google provides countless links. Many point to the fact that an MBA from a program OUTSIDE of the top 10 provides the highest ROI because of the high sunk costs associated with these programs (these programs being the most expensive to attend). All of this talk is second to the notion that if you are considering an MBA you need to do it for the sake of education. Money will come if you are good at what you do, regardless of what financial institution you wrote checks to.

Economic Logician said...

Anonymous: you contradict yourself: first you assert that the ROI is high for programs outside the top 10, then you claim that the institution does not matter...

But the point of the study I discuss is that it is the first to have a proper control group. This allows to compare the outcomes of those who did an MBA and those who did not, controlling for initial characteristics. The studies you cite only compare incomes before and after then MBA.

Concordius said...

Think the point "anonymous" makes above is that the ROI on programs in the top ten is lower than programs outside the top ten. This is because top ten programs cost big bucks. There's likely validity there. Most people who go to Wharton/HBS/Stanford etc. do not make 7 figures a year. In these markets tough to say if you can make it with or without an MBA! Course, if you haven't gone to school yet it might be a good place to hide...Good luck.

Relevant Read said...

http://yahoo.businessweek.com/magazine/content/06_12/b3976089.htm

Internet Marketing Coach said...

I just got accepted by a business school ranked in the top 10 globally. I wrote in the 80th percentile on the GMAT. I am 26 and self employed.

My opinion is that an MBA is a tool. You can give the tool to someone who is able to use it and to someone who is not. You will get different results.

With regards to the ROI and the figures presented above. What is the time frame from which this return was calculated in and what does it represent? Obviously if you are paying double to get an mba you wont get your money back as fast. But what is the return in the long run?

An MBA wont give you a return just for one year, two or three. It will place someone in the position to make more for the rest of their lives if used properly. At the same time the return is not only monetary. I believe that when I walk out of there with my degree it will be up to me to make something of what I learned.

Getting a new tool isn't any good if you don't use it properly.

dianna.rose83@gmail.com said...

Many institutions limit access to their online information. Making this information available will be an asset to all.

Katie said...

I'd have to agree with Internet Marketing Coach the most. I'm actually looking into applying to Thunderbird's executive MBA program; thankfully it is ranked in the top five. Although that's not the main reason I'm considering applying there. I have numerous friends who have earned MBA's or gone through certificate programs through Thunderbird and have all walked away with a great experience on top of new knowledge, and also new friends and potential business partners from networking while in their programs. I think an MBA is worth it as long as you make something out of it; it will pay off in the long run if you use it to your benefit.

Tristan Scott said...

Hey completely a different dimension for those who are or have done full-time MBA. I think no one would have ever thought like this. Kudos to you!