Question: Are MBA programs responsible for the theories behind the crisis?
Justin Fox: I think about this a lot. And the difficulty I always have is, I have this impression that you look at what is in the textbook of MBA finance courses that is being taught everywhere, and there’s an indoctrination going on. But when you start talking to MBA students—I have talked to several at Harvard who said, “Yeah, we saw that in the class, but we never paid any attention to it.”
It is always hard to puzzle out the influence of the ideas that come out of universities on real life. The whole premise of the book [The Myth of the Rational Market] is that they do matter, and they are important, but I’m a little hesitant to claim that that did everything.
Definitely, something that came out of business world is the change that went on in business schools starting in the 50s and the 60s. This general idea that imparting lessons on how you are supposed to behave as an executive is not enough. You need this science that explains what is going on, and economics can offer a lot of things that look like science, especially lessons about how you incentivize people to behave in certain ways. That became really influential, and I don’t know how much every last MBA grad was inculcated with it, but it definitely spread out in the corporate world and in the 90s I wrote about it.
And in some length in the book, this sense that, “If only CEOs were paid in a way that incentivized them better to want to do right by shareholders, then this would be a better world.” And that turned out to, at some level, succeed in the early and mid 90s, and it made corporate executives a lot more interested in shareholder value and maximizing stock price. But it also just reached the point of insanity by the late 90s when this focus on stock price came to just replace things that actually create value for corporations over time.
Question: How should MBA programs change in light of the crisis?
Justin Fox: That’s the puzzle.
One of the stories I tell right at the end of the book is: this young behavioral finance professor, very critical in his academic work of deficient market theory, talks about teaching MBA students at Harvard finance, and says that when it comes down to it, he’s still closer to believing that the market is efficient than they are, because there are all these genius MBA students at Harvard who think they are smarter than any market can be.
So he ends up teaching pretty conventional efficient market stuff to the first-year students. He might then move on later to more complex things. And that is one of the fascinating things—there isn’t any sort of overarching replacement.
My sense is what should be taught is there isn’t any overarching model that explains everything about the market. You should look at several different ones. I think that is always a difficult thing for people to swallow, when they had this very simple way of teaching how the world works. And suddenly you say, “Oh no, you know you have to use judgment in a lot of different ways.”
So my sense is that there is clearly a lot more interest among MBA students of other things besides incentivizing people with stock options and there’s a whole movement toward reciting oaths of honor when people graduate—they just suddenly took off this spring.
So with the level of the students there is interest in other things, there is a sense among the faculty that maybe they got their focus wrong and their incentives wrong. But I don’t know. And maybe I’m just not close enough on the ground to it. I don’t sense that there is wholesale replacement about to happen with some other way of teaching how markets work.
Recorded on: June 30, 2009.