Category: MBA

A powerful study by Goldstein and Johnson in 2003 explored the relevance of defaults in organ donation. We discussed their findings and the implications in our class on “Values based Leadership.” Most countries have big problems with organ donations due to the large gaps between the number of donors and the number who need organs. However, this graph illustrating the difference in organ donation rates in the European Union is telling.

As you can see, countries like Denmark, the UK, the Netherlands and Germany average around 10% while the rest are close to a 100%. The difference? Defaults.

In the “default” countries, citizens see a checked box in the form they submit to sign their driving licenses (for example) that says they will donate their organs when they die. It is up to them to un-check the box. And, clearly, very few do. This idea has been documented in researcher Richard Thaler’s book, “Nudges,” which discusses how small nudges by policy makers can make a big difference in society. This is an example of that. And, Goldstein and Johnson’s research shows that defaults are a powerful way to influence people.

I think this research also speaks to the power of strong cultures. Strong cultures are built around defaults and the idea of “this is what people like me do.” Defaults may just be the closest shortcut to cultural change. Governments such as the UK have understood that and have been setting up “Nudge committees” to study areas where important policy can be nudged. The challenge, of course, is that people hate the government playing big brother. However, nudges and the idea of defaults are here to stay and it’ll be interesting to see how policy makers use these tools to influence us.

One such researcher who is working hard to change things is Dan Ariely. And, I am reminded of this comment from him when I interviewed him 2 years back.

“I look at the whole world, and then I say, “Is this a place that is the outcome of 7 billion rational people? If everybody was perfectly rational this would have been the best world imaginable. The conclusion very easily is no. In a couple of hours I’m leaving for Africa where there’s a tremendous amount of illness and poverty. There is also a tremendous amount of hope. If this world is not the outcome of 7 billion rational people, maybe we can do better.

It’s true that when you look at individuals, you can say for each individual, “I wish you were more rational in some ways.” But for the planet as a whole you say “My goodness the gap between where we are and where we could be is tremendous.” There are a lot of things to improve. I think we can do much more. That’s my hope. My hope is that as we’re learning more we will improve things. Both in terms of my personal life and in terms of my outlook on the world in general, it’s a good thing.”

Since it is the new year, I thought I’d tackle the big question – “Why bother with an MBA?” At any given time, there is a fair amount of opinion in the press on the MBA. Some say it is useless, others warn us about possible pitfalls and a few dare to be bullish.

My view is that the truth, like most things, in life is somewhere in between. So, here are a collection of my thoughts based on what I’ve seen and learnt –

1. The biggest trouble with an MBA is that there is no single consistent academic experience. Most Masters in Computer Engineering programs teach the same core concepts. Yes, you sort of do that with an MBA. But, then again, not really. You have a lot of freedom and flexibility to learn things you care about. Then, the next problem is that practically every university has an MBA program. That’s where the rankings come in.

2. The rankings have all sorts of faults. Most of them don’t measure what a school should actually be measured on simply because the data isn’t easily available (or the publications just couldn’t bother). But, if you aggregate them together, there are consistent patterns in the schools that show up in the top ten, the top twenty and so on. This distinction matters for calculations on return-on-investment.

3. I know this seems like a really mercenary way to approach this. But, I’d like to get it out of the way because return-on-investment matters (ROI) a lot. Students spend roughly $200,000 in the two years and a lot more in the opportunity costs of missing out on two years worth of earnings. They’re also doing so in a high-growth phase of their careers. For a large proportion, this is an opportunity to level up and move to a career that’ll give them more opportunities and/or more income. ROI matters. I’m not clear what the ROI numbers are – but what I am clear about is that the degree is, unfortunately, not equal. Just as a Masters in Engineering at an MIT will always be valued much higher than most other places, similarly, being lucky and skilled enough to be able to get into a top school changes a lot.

4. Once we’ve got the financials out of the question, what is the experience really worth? We interviewed venture capitalist Brad Feld over Skype yesterday and one of my classmates asked him a similar question. He reflected on his own experience at MIT-Sloan and said – “An MBA is a nice two year vacation from reality. And, in many cases, such a vacation is very useful.” And, he went on to talk about the ability we have to think about our long term careers, switch career tracks, and make decisions that can alter the course of the life. And, it is true. It is not always we’re presented with opportunities to do that with so many options.

5. The other idea I will pick is a recent post from Seth’s blog. This post was shared by our Professor in our introductory Microeconomics class just two days ago.

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Doing calculus with Roman numerals

Quick, what’s XIV squared?

You can’t do advanced math without the zero. And you can’t write precise prose without a well-developed vocabulary.

The magic of the alphabet is that twenty-six letters are all you need to spell every word. The beauty of Lego blocks is that you don’t need very many to build something extraordinary.

Imagine how hard it would be to get anything done, though, if you only knew 17 letters.

In most fields your work is hindered if you only have a few of the most basic tools. Understanding more of the building blocks of finance, or marketing or technology are essential if you want to get something important done.

Here’s my advice: Every time you hear an expert use a word or concept you don’t understand, stop her and ask to be taught. Every time. After just a few interactions, you’ll have a huge advantage over those who didn’t ask.

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The way I see it – the bold-ed bit is what an MBA gives you. It doesn’t do enough in terms of explaining the building blocks of technology as yet. But, there’s already a fair bit of choice in many schools and it is on the rise. It always takes education a few years to catch up with change.

6. Does that mean everyone needs an MBA? Absolutely not. There are so many ways to get this sort of knowledge on the internet and in books. So, if you really wanted to get the knowledge, you can (you can just just follow Seth’s excellent advice). My view is the following – if you value learning about business (academics), if you value/need taking some time out to think about what you really want to do (career), and if you value working with, getting to know, and building relationships with peers from many different backgrounds,  many of whom also tend to have similar hopes and dreams as you, then I think you’ll really enjoy the MBA experience.

7. There are many reasons MBA grads get flak from employers – too much entitlement, not enough value added, etc. And, I daresay there are always going to be a few who will give others a bad name. But, on the whole, I do feel there is a lot of value the education brings. In my first quarter alone, I feel like I have gained insights that would have been very helpful in my jobs over the past few years. The nice thing about this learning is that it is all connected and reinforces each other. Accounting inter links with finance which inter links nicely with building companies which requires marketing and so on. I think it’ll help future entrepreneurs and business owners avoid a few fundamental mistakes and it’ll help anyone working in a company make better decisions (if they paid attention in class). And, who knows, maybe avoiding a mistake in giving out equity could save you half a million dollars as your business scales. That’s already the cost of the degree and more..

8. As you can tell, this is clearly a collection of my unstructured thoughts on the subject. I am, of course, biased. I can’t say much about whether this investment will lead to x or y result in 20 years. I honestly don’t care that much. I am here because I really wanted to learn, to think about what I really want to do, and to meet, work with and build relationships with some very interesting people. And, so far, the experience has stretched me, made me think, and given me an incredible amount of learning opportunity. And, the sheer intensity has kept me on my toes. In short, I’m loving it.

9. I do, however, think it helps keep perspective that this is just a wonderful way to spend 2 years of my life. It is learning geek paradise in some respects. It is not practical for many and definitely not a necessity. For this, I will go back to Hunter Walk’s brilliant post on “It’s fine to get an MBA, don’t be an MBA.” If you haven’t read it, please do. Here’s my favorite bit.

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Getting an MBA means you’re curious to learn broadly about theories and explore how these techniques can be applied to various businesses. Being an MBA means you think you’re getting taught the one right answer to problems – to a hammer everything is a nail – and that only MBAs know these dark arts.
Getting an MBA means offering your perspectives and experiences to your classmates. Being an MBA means looking at your peers as networking targets.
Getting an MBA means thinking about your degree as just another attribute of who you are – I have brown hair, a wife, work at Google, enjoy citrus fruits and possess a Stanford degree. Being an MBA means you are “Hunter Walk, Stanford MBA,” elevating the matriculation to a level of undeserving primacy.

Getting an MBA means you shoot out of school wanting to prove yourself and see what you can contribute to others. Being an MBA means thinking the world owes you something and that your value 10x’ed just from spending two years on a campus.

At the end of the day, just be who you are, which is a collection of skills, abilities, successes, failures, fears, dreams and hopes. The most important degree you possess is Human University.

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This, of course, applies to any accomplishment. Results happen to us due to good processes and a fair dose of luck (e.g. in this case, being born in the right place) – don’t let them define you. It is the same deal with this degree – if you think it’ll add value, it will. If you want to make it meaningful, it will be. Don’t do it for the tag. Do it because you’ll learn and get better. And, if you don’t do it, that’s okay too.

In either case, we’re on this planet for a short period of time, at least in the giant scheme of things. Let’s just focus on making it meaningful, making it count.

A brand is simply a network of associations that exist in the minds of customers. Seeing the famous Nike swoosh or the Coca Cola logo triggers associations in our mind.

Brand associations are incredibly powerful because they stick. Malaysian Airlines, for example, is likely to face the consequences of its two tragedies for a very long time. These discussions naturally lead us to discussions around what companies do with these associations – rebranding, repositioning, etc. We’ll leave those topics for a later time and, instead, learn from one of the early exponents of the power of a brand – Blackbeard the Pirate.

Edward Teach or “Blackbeard” is one of the most famous pirates in history. And, after an apprenticeship with some famous pirates of the day, he went on to build an empire of sorts. While he wasn’t the most successful pirate in terms of loot, he definitely succeeded in leaving behind an unparalleled legacy. Here’s how –

1. The name – Blackbeard. It is unknown where he got his famous nickname. Given his mastery of the art of building a brand, we could suspect that it might be the work of the man himself. He was a shrewd and calculating businessman who knew that intimidation mattered greatly as a pirate. The more intimidated his opposing ships were, the less men he would lose since they would give up without a fight.

2. Devil’s image. Blackbeard knew the importance of image in his line of work. Before battle, he would dress all in black, strap several pistols to his chest and put on a large black captain’s hat. Then, he would put slow burning fuses in his hair and beard. The fuses constantly sputtered and gave off smoke, which wreathed him in a perpetual greasy fog. He looked like a devil who had stepped right out of hell and onto a pirate ship and most of his victims simply surrendered their cargo rather than fight him.

3. The first pirate flag. Blackbeard was a true innovator in using insignia. He realized that he would be able to intimidate ships best if they knew he was coming from afar. So, he created his flag – a skeleton spearing a heart while toasting a devil. Pirates later simplified it to the modern version which just depicts a skull and bones.

Blackbeard understood that he wanted one association when people thought of him – fear. And, he carefully crafted an image around fear that has lasted well past his time. His is a wonderful lesson in building powerful brands while also prompting the question – what is your personal brand? Is it what you would like it to be? What do you do to live up to the brand you aspire to be?

As you can tell with Blackbeard’s tale, these often become self-fulfilling prophecies…

If you ask for 5 words that form part of traditional business jargon that people hate, the word “synergy” would be right up there. Given its horrible reputation, I was curious to learn more and we discussed the idea at length at our intro strategy class. Here are a few notes –

1. The economic view on synergy is – (how big are the gains) x (how achievable are they) – (costs involved). So, in essence, synergy is just a calculation that multiplies potential gains by the probability of achieving them and subtracts the costs involved.

2. The core idea is that two organizations can combine to create more value as a group than they did individually. Value can be created by either increasing benefit to customers or reducing cost. But, this is where things get a bit nuanced and tricky.

3. Combining two organizations just because they have something in common does absolutely nothing. Good strategy is when the acquisition enables the acquirer to fundamentally change something about how they do what they do. This works well when they have strengths that complement each other. A great example of this is Disney acquiring Pixar. Pixar gave Disney strength in computer generated cartoons and a creative engine that churned out a great movie every 2 years. Disney, on the other hand, could use all of Pixar’s characters in its theme parks and merchandise. In order to avoid too many organizational costs like a clash of cultures, Disney allowed Pixar to operate separately and this acquisition has worked incredibly well for them.

4. It does gets tricky at this point, however, because acquisitions we read about in the press largely talk about potential gains and completely neglect the potential costs. That’s the part of the synergy equation that is normally forgotten or omitted. Researchers have dug into this question over many years – why are acquisitions regularly over valued when they fail so often? There have been many explanations with CEO hubris, poor decision making processes being suggested as possible explanations. But, the fact remains that the costs of a potential acquisition are generally glossed over. And, every time you see an acquisition announced, it is definitely worth looking for whether the acquirer discusses potential costs and challenges. It is quite amazing how regularly this isn’t discussed just given the base rate of failure.

5. Warren Buffet once said – “Synergy is a term widely used in business to explain an acquisition that otherwise makes no sense.” And he’s absolutely right. Synergy has been used to describe business decisions that can best be describes as illogical or fuzzy. And, the take-home message is definitely to continue to be wary when you hear “synergy” because very few actually understand it and use it consistent with its economic definition.

6. Finally, a quick personal application. Every gain we foresee comes at a cost. It is regularly tempting to only think about and discuss the gain. When we do that, it pays to remember that we’re guilty of the exact mistake that costs many companies billions of dollars and many smart executives their job. Make sure we look at both sides of the decisions make. As economists like to say, there is no “free” lunch.

So, yes, we are back a full circle to where we started in terms of our suspicion of the word. But, hopefully, the journey has been useful.

We discussed a a segment on CBS regarding Pay Day loans in our accounting class. CBS discussed a Pay Day Loan organizations that charged a bi-weekly interest rate of 15%. They spoke about how outrageous this was as, in their estimation, this meant the lender was charging customers an interest rate of 400%. Now, let’s get into the numbers –

The first step is to spend a minute understanding compound interest. Every great personal finance book starts with requesting the reader to appreciate the beauty and power of compound interest. So, here goes – let’s imagine you have a principle amount of $10 growing at 10% compound interest per year. That means –

At the end of year 1, you have interest of – ($10 x 10%) = $1 
At the end of year 2, you have interest of – $1 + ($10 x 10%) + ($1 x 10%) = $2.1

That little snippet describes what makes compound interest special. In the first year, you earn $1 on the initial $10. But, in the second year, you not only earn the $1 on the $10, you also earn an additional $0.1 on the $1 you earned last year.

At the end of year 3, you have interest of – $2.1 + ($10 x 10%) + ($2.1 x 10%)  = $3.31
At the end of year 4, you have interest of – $3.31 + ($10 x 10%) + ($3.31 x 10%) = $4.64

So, over time, it keeps giving you returns on the interest you already have. Substitute these with much larger numbers and a long time period, and you’ll see how quickly compound interest can increase wealth. The formula for compound interest is P (1 + r)^n where P is the principal, r is the rate of interest and n is the number of time periods.

Let’s go back to the loan sharks now. The rate of interest is 15% and the time period is bi-weekly. There are 52 weeks in a year => 26 “bi-weekly” time periods. CBS’ calculation was 15*26 = 390% or around 400%. This equates to $400 of interest for every $100 in 1 year.

However, they’ve forgotten that the 15% interest is compounded. That means the lenders also charge the 15% on the interest to be repaid over time. This means we have to think of it in terms of compound interest. The real rate, therefore is (1 + r)^n or (1+0.15)^26 (assuming principal to be 1) = 37.86 or 3,786% 

If you’ve ever wondered how loan sharks make money, that is how. For every $100 loaned by a loan shark, they get around $3,786 back in a year for a “15%” bi-weekly interest rate.

One final note – bankers have come under lots of criticism since the financial crisis. While the industry definitely deserves the sort of scrutiny it has been getting, there was commentary about whether life was better without banks. I think this example illustrates how critical banks are towards progress in society. If we’re complaining about a 20% interest on our credit cards, well, maybe we ought to speak to a loan shark..