There are good reasons to go to business school and then there are bad reasons to go to business school. Let me share one of the worst reasons I’ve ever heard. For privacy reasons I have changed some names and numbers.
I recently spoke to a friend, Peter, who is a partner at a private equity firm. He beamed at how their youngest son ended up at U Penn after letting him take a gap year after high school.
“Going to college today is like playing roulette! You really never know where you’ll enter!” he said. “My son was rejected everywhere except his first choice. Go figure!”
I congratulated him because it seems like an impossible mission these days to go to an Ivy League school. He then went on to say that one of his associates was leaving to attend Harvard Business School.
I asked him why and Peter said the employee wants to explore venture capital or fintech after graduation. That sounded good at first, but not after my friend gave some more explanation.
An illogical reason to go to Business School
“This employee of ours is amazing! Everyone loves him and he does a great job,” explains partner Peter. “He went to a state school, worked at Morgan Stanley for two years, and then we hired him two years ago.”
“I don’t understand why he’s leaving,” I replied. “Can’t he just stay on and move on to your firm?”
“Yes, we would definitely give him a big chance. But he wants to discover new things. And these kids graduating from Harvard Business School and the like also have a lot of options open to them.” Peter responded.
Then I asked Peter how much his partner will earn this year at the age of 27.
“About $600,000 all-in, including some of his carry.”
Wow! The Associate is going to make $600,000 from a private equity job, thousands of MBA graduates would die to land and he’s leaving?! Oh boy. Talk about illogical.
Private equity is one of the industries where you can easily earn more than $1 million a year.
The opportunity cost of going to Business School
I understand the desire to attend business school if:
You want to change careers You are stuck in a hopeless job that you don’t want to do You want to increase your income because it is currently so low You are financially secure and need a two-year break to find something new
But you are NOT giving up a $600,000 job at age 27 for two years to find another job in a similar space! The opportunity cost for this Associate is at least $1,200,000 in lost salary plus $115,000 in tuition.
If the employee rose to senior employee, vice president, and then director, the opportunity cost could run into the tens of millions. I have no doubt that partner Peter makes at least $5 million a year.
However, if the employee was making $150,000 a year or less, it would be more reasonable to go back to business school full-time. The opportunity cost over two years would be about $415,000.
But if you go to business school, where the goal is to maximize returns, missing $1,200,000+ in revenue is way too much.
The desire for prestige can be a wealth killer
I asked Peter if the employee has automatic permission to rejoin his company after graduating from business school.
Peter said, ‘We would certainly give him a good look. But there is no guarantee. We only hire one person per year from the business school.”
In other words, if the employee changed his mind, he would probably have less than a 25% chance of getting his old job back. Those odds are terrible! The employee can also fall into a recession and get nothing.
I told Peter that the choice of the employee makes no sense. Participating in venture capital may seem more exciting because the employee will be looking at earlier stage companies. At the end of the day, though, it’s the same old thing. He will endeavor to close deals, network and create financial models.
Then Peter said, “He just really wants to go to Harvard.”
Ah well, that insatiable desire for prestige when you’re young. The younger you are, the less you have accomplished. Therefore, it is understandable that the importance you place on where you went and went to school is higher.
But as any elder knows, where you went to school after several years of work says nothing. What you do at work and the people you develop relationships with are most important.
More reasons why I’m against his decision to go to B-school
Maybe I’m the odd one out because I write about personal finances. The way I look at money and time can be very different from the average person. But I worked in investment banking for 13 years and went to business school.
So let me share some more thoughts as a middle-aged man who has a good idea of what the next 20 years of this employee’s life will be like.
1) No extra luck.
After making about $200,000-$250,000 as an individual or $300,000-$350,000 as a cohabiting couple, you’re not going to get lucky. At $600,000, this single employee already earns far more than his maximum happiness potential. Plus, we know that there are plenty of six-figure income people who are absolutely miserable at their jobs.
2) May increase anxiety and disappointment.
If he doesn’t get an equally paying job and a better title after business school, he may feel like a failure. $1,315,000 in opportunity cost is a high hurdle for a recently graduated business school. Remember that business school emphasizes the importance of a high return on capital. He’s not going to graduate in the arts and sciences.
The employee could easily go to Harvard and get a job similar to any other non-top 5 MBA graduate of a business school. Than what? Inevitably, some in his class will do a really good job of creating more jealousy.
3) He will grow up and have other priorities.
Not a single successful person I know cares about where they went to college or where anyone else went to college. Instead, the more successful you are, the less you want to share where you studied, especially if it’s an expensive private university.
His life will be filled with work and life challenges that will push his degree to the bottom of the world. The desire to stick your alma mater’s sticker in your rear window has dwindled to zero by the time you’re 40.
4) Time is very precious.
One of the drawbacks of going to business school, law school, dental school, medical school, or any other type of graduate school is that once you graduate, you usually have to work a longer period of time to justify your graduate school decision.
When you’re younger, you feel like time isn’t as scarce or as valuable. Unfortunately, we don’t live forever. And if you die early, going to business school can delay some of the things you really want to do or have.
For example, if this employee wants to start a family, there is a good chance that he will have to postpone finding a partner and having children for at least two years. Once he graduates, he will do everything he can to do his best to return, which could delay him finding love for another 3-5 years.
The Better Business School Decision
If I were the employee’s trusted uncle, I’d tell him to stay in his private equity shop for another year and defer admission. During this time, I recommend that he save 80% of his after-tax income. He could easily save $250,000+ and live on $80,000.
During his third year as an employee, he was able to have the company tell him whether he was on track to become a director or not. If he isn’t, go to business school. In this way, he has saved more money and does not have to doubt his choice.
The problem I sometimes see with young people who make a lot of money is that they always think they can make a lot of money. Unfortunately, life happens.
I know plenty of six-figure earners who went to business school and joined fintech startups. Their hope was that they would win the lottery with equity. Unfortunately, working in fintech doesn’t pay well and few make it huge. And even if these fintech companies go public, there is no guarantee that they will perform well.
Everything will probably be fine going to B school
For all the reasons I think the employee shouldn’t go to business school, he’s probably going to do great financially. It’s a free world and he should do what he wants!
What we don’t know is that he may have been completely burned out by private equity. Or maybe he doesn’t really like the company or the people he works with. If so, going to business school will be a great time to network, reflect, and explore. He clearly has enough money after working in banking and private equity for over four years.
Finally, there could be some asymmetric information going on here. I know partner Peter loves his partner because he told me. But maybe the employee doesn’t really know how much Peter loves him at the firm. Some of me are not very good at communicating their feelings, especially to subordinates in a work environment.
If the employee knew how much goodwill he has with the company, he might never leave!
Readers, what do you think? Does the employee have to give up his $600,000 job to attend Harvard Business School? Or should he continue working in private equity so that he can make over $1 million by age 30? Is working in private equity really that much worse than working in venture capital or in fintech, where you don’t actually earn much?
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This post The Most Illogical Reason to Go to Business School I’ve Ever Heard
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