Back in 2013 I made a post discussing my personal reasons for pursuing my MBA. See post here! However, despite being a self-declared math geek, my analysis was extremely qualitative in nature and really didn't address the quantitative aspects of the MBA. As the debate rages, I have given some thought in terms of the true way to evaluate the cost of the MBA. Here is what I came up:
If you eliminate the qualitative aspects of your career and look solely at the numbers, it isn't dissimilar to performing a Discounted Cash Flow analysis on your personal lifetime earnings. So all you need to do is compare the two scenarios -- (A) do NOT get an MBA and (B) get an MBA. "Simply" project out your earnings each year through your life, subtract out the incremental expenses from the MBA, discount everything back to present value, and voila you have your own personal Net Present Value of your career. Higher NPV wins.
Obviously this method aligns well with financial theory but in practice is nearly impossible. There are too many variables to allow us to come close to predicting our future earnings with any reasonable certainty. As a result, I think it makes more sense to deconstruct what the theory is telling us so we can convert it into something that is easier to interpret. This will at least enable us to make a more informed decision as to what is the true cost of an MBA.
Lesson #1: Your earnings are pushed out two years with an MBA.
Pretty obvious one here but worth mentioning as it is the foundation of another key lesson. A traditional MBA is essentially a two year holiday from earning income for most people. Sure, there is the summer internship, working during the school year, and things of that nature. But for the most part, your earnings will be put on hold for the length of the program.
Lesson #2: The shift impacts the BACK of your career, not the front!
I think this lesson goes against the traditional thinking of opportunity cost. Most people cite their current earnings as their opportunity cost, but I don't think that is the most appropriate method. Let's compare two scenarios in which (A) an individual continues in their career and (B) puts their career on hold for two years to get an MBA and then continues in the same career as scenario A. Obviously this is very unlikely, but I think it is important to hold all other variables constant to the best of our ability. In this comparison, the individual who gets the MBA loses out on three fronts. First, they have to pay the price of the MBA in years 1-2. Second, time value of money would suggest that a two year hold on this individual's earnings is going to diminish the value of their post-MBA earnings, even if it is the same in absolute dollars as scenario A. Third and finally, the two year delay actually truncates the LAST two years of one's career, not the first. This of course assumes that the individual retires after a certain number of years rather than after hitting a specific dollar value. Fortunately those earnings are 35+ years in the future, so discounting them doesn't make the cost of the MBA seem obscene.
So this analysis utilizes some pretty big simplifying assumptions, particularly that your career will be unchanged after doing the MBA -- which, if you think is true, is problematic in itself. In fact, that is probably the single biggest variable that drives the whole exercise as to whether the MBA is worth it. However, I do think this is a useful thought experiment to rethink using your current salary as your "opportunity cost."
Admittedly, there are some pretty meaningful unaddressed considerations that I didn't include above. But I thought I would at least throw this out there for consideration and feedback!
Hey CompBanker, I'm the WSO Monkey Bot and I am sad to say, but this thread is lonely, so thought I'd post in here to try and help out. Some potential topics that might help:
Hope that helps.
Don't know why no one took this up, as usually flipping a well-worn concept on its head leads to thoughtful discussion.
Two issues though in this thought experiment: 1) for a great many students, the cashflow projection does change (and is indeed often the point of doing an MBA) and 2) while very few verbalize it this way, for a great many students, the MBA is lowering the discount factor on their future cashflows, which can still positively affect NPV.
Expanding slightly on the above: cashflow projection delta. Off the bat, not much will change for students with an IB/PE/HF pre-MBA background. But there's always a massive chunk of students whose pre-MBA compensation is in the $60-100k kind of range, and for them, business school transforms their future cashflow scenarios.
On the discount factor, this affects many more students. The MBA adds some generalist breadth/optionality to almost all of its students. It's an extra sheen of credibility, and widens and/or deepens their network. The cashflow projections are what they are, but this qualitative aspect of the MBA experience is de-risking all of those cashflows. Even those students who come from elite backgrounds see some benefit from this. I'd wager the vast majority of prospective and even current MBAs underestimate this variable, and focus on projecting cashflows to a fault.
Happy New Year!
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