Published Nov 22, 2004
On one level, it’s a little disturbing that my high-effort, high-stress business school experience can be reduced to such a simple, clear, and exactly descriptive metaphor. On the other hand, it’s convenient, and we’re all about efficacy and efficiency at b-school. So, here it is. Businees school really is like a portfolio of risky securities!
In a major exception from my usual practice, I’m actually going to try and explain what it is that all this means. What, 2/3 of my readers are asking, is a portfolio of risky securities? Well, it’s pretty much what it sounds like: it’s a stock portfolio. An agglomeration of stocks that you — yes, you — own. It’s risky because, well, stocks are risky. They might be worth more tomorrow, they might be worth less, so you might end up with a profit or a loss on your stock transaction. The individual stocks change value in certain ways, and the whole portfolio changes value in related ways that I’ll get into later. Make sense?
So, how is b-school like a portfolio of risky securities? Well, imagine that the market return — the return you’d make if you invested in all of the stocks in the market — is the mean return from business school, mean return being some function of grade, activity leadership, and job placement. Just like you want your portfolio’s return to exceed the market return, you want your b-school return to exceed the mean return of your classmates. Just like in the stock market, you don’t want to make more than other people because you want those others to lose; you want to make more because more is good (stop me before I go all Gordon Gekko here).
In the stock market, you can increase your returns by investing in riskier securities (riskier securities have a greater return than securities with lower risk because the market demands more return for putting up with the risk, so the companies represented by the securities have to step up and deliver high returns or be unable to raise money by issuing more equity, or stock). In business school, you can learn more by taking harder classes, or by being more involved in activities, or by looking harder for a job. All of these increase your risk because they take time away from other activities, leaving you open to not getting such good grades, or not getting a job or internship, or letting your clubmates down. If you’re overcommitted, you can get some great experience but you can also flunk out.
Now, with a portfolio of securities, you try to get securities that don’t all vary in the same way. If you own an airline stock, whose value may go down if the price of oil (and, thus, jet fuel) increases, you can “hedge” your portfolio by also owning, say, ExxonMobil, whose value will go up if the price of oil goes up. You can do the same in b-school too; I may take two Marketing classes to balance out the effect on my GPA of taking another Finance class, for instance. You try to balance out the potential gain in knowledge but loss in GPA by taking easier classes from which you may learn less.
It can get more complicated than that, too. If you own stock in a company and you think the company could make more money if they took on more debt, you can effectively take on that debt on behalf of the company by borrowing to buy that company’s stock. If you can borrow money at the same rate as the company, what’s the difference between owning 100 shares of stock in a company that’s borrowed 40% of its value and owning 100 shares of stock in a company that’s not borrowed anything but you borrowed 40% of the value of the shares? None, it turns out. You can leverage your b-school portfolio too. Think a course isn’t giving you enough knowledge transfer? Take on more of the group work and learn more, but at a cost of borrowing time from your other activities.
Now, in the stock market, there’s an ideal portfolio for you — based on the market’s return and your tolerance for risk you build up a set of stocks. Is there an ideal portfolio for a b-school student? Perhaps one can pick the classes and activities that offer the best balance of learning and experience and a tolerable risk of flunking out and driving yourself to complete exhaustion. Most students already understand the concept of hedging a hard class with an easy one, and most students already understand the concept of leveraging their educational experience by putting more or less effort into different classes. Seems reasonable, then, that we could model an ideal class schedule. A good challenge for me next semester, when I get to pick my electives for the fall, eh?