Should We Blame MBAs for the Crash?
Justin Fox is the business and economics columnist for Time magazine. He also writes the "Curious Capitalist" blog at Time.com.
Before joining Time in January 2007, Fox spent more than a decade at sister publication, Fortune. At Fortune, he covered a wide variety of topics related to economics, finance, and international business. In 2000 and 2001, he was the magazine's Europe editor, based in London.
Earlier in his career, Justin worked at several newspapers, including American Banker and the Birmingham News. He has a B.A. in international affairs from Princeton.
Fox is a Young Global Leader of the World Economic Forum. His first book, The Myth of the Rational Market, will be published by Collins in 2008.
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.
Justin Fox, Time’s business columnist, worries that MBA programs have been structured to teach economics as a science, which it isn’t; he prescribes a way for these schools to change for the better.
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Why this matters<img type="lazy-image" data-runner-src="https://assets.rebelmouse.io/eyJhbGciOiJIUzI1NiIsInR5cCI6IkpXVCJ9.eyJpbWFnZSI6Imh0dHBzOi8vYXNzZXRzLnJibC5tcy8yNDU2MDQ1OC9vcmlnaW4uanBnIiwiZXhwaXJlc19hdCI6MTYzOTkyODg5NX0.O3S2DRTyAxh-JZqxGKj9KkC6ndZAloEh4hKhpcyeFDQ/img.jpg?width=980" id="3770d" class="rm-shortcode" data-rm-shortcode-id="3c27b79d4c0600fb6ebb82e650cabec0" data-rm-shortcode-name="rebelmouse-image" />
Area in which trees were located
Credit: University of Copenhagen<p>As important as trees are in fighting climate change, scientists need to know what trees there are, and where, and the study's finding represents a significant addition to the global tree inventory.</p><p>The vegetation Brandt and his colleagues have identified is in the Western Sahara, a region of about 1.3 million square kilometers that includes the desert, <a href="https://en.wikipedia.org/wiki/Sahel" target="_blank">the Sahel</a>, and the <a href="https://www.sciencedirect.com/topics/agricultural-and-biological-sciences/subhumid-zones" target="_blank" rel="noopener noreferrer">sub-humid zones</a> of West Africa.</p><p>These trees and shrubs have been left out of previous tabulations of carbon-processing worldwide forests. Says Brandt, "Trees outside of forested areas are usually not included in climate models, and we know very little about their carbon stocks. They are basically a white spot on maps and an unknown component in the global carbon cycle."</p><p>In addition to being valuable climate-change information, the research can help facilitate strategic development of the region in which the vegetation grows due to a greater understanding of local ecosystems.</p>
Trained for trees<img type="lazy-image" data-runner-src="https://assets.rebelmouse.io/eyJhbGciOiJIUzI1NiIsInR5cCI6IkpXVCJ9.eyJpbWFnZSI6Imh0dHBzOi8vYXNzZXRzLnJibC5tcy8yNDU2MDQ3MC9vcmlnaW4uanBnIiwiZXhwaXJlc19hdCI6MTYzNTk5NTI3NH0.fR-n1I2DHBIRPLvXv4g0PVM8ciZwSLWorBUUw2wc-Vk/img.jpg?width=980" id="e02c0" class="rm-shortcode" data-rm-shortcode-id="79955b13661dca8b6e19007935129af1" data-rm-shortcode-name="rebelmouse-image" />
Credit: Martin Brandt/University of Copenhagen<p>There's been an assumption that there's hardly enough vegetation outside of forested areas to be worth counting in areas such as this one. As a result the study represents the first time a significant number of trees — likely in the hundreds of millions when shrubs are subtracted from the overall figure — have been catalogued in the drylands region.</p><p>Members of the university's Department of Computer Science trained a machine-learning module to recognize trees by feeding it thousands of pictures of them. This training left the AI be capable of spotting trees in the tiny details of satellite images supplied by NASA. The task took the AI just hours — it would take a human years to perform an equivalent analysis.</p><p>"This technology has enormous potential when it comes to documenting changes on a global scale and ultimately, in contributing towards global climate goals," says co-author Christian Igel. "It is a motivation for us to develop this type of beneficial artificial intelligence."</p><p>"Indeed," says Brandt says, "I think it marks the beginning of a new scientific era."</p>
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Credit: NIKOLAY OSMACHKO from Pexels
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