Signaling is a concept from economics which makes the vast majority of higher schooling seem irrelevant. Why else do financial services firms oftentimes seek physics and math students (often with negligible background in business or finance)? Why else are pre-medical students required to endure class after class of essentially zero relevance to their profession of choice? Economists would argue that such “illogical” market behaviors are due to firms recognizing that not only are the most useful skills taught on-the-job or in job-specific training by firms and specialized professional schools (i.e. medical school’s latter clinical years), but that the best indicator of future success and productivity comes from demonstration of intelligence and perseverance in the face of mental adversity.
Whether or not this is socially useful or even true is another question, but signaling seems to help explain the widespread prevalence and demand for individuals with M.B.A’s. Today’s corporate boardrooms are full of proud MBA-holding executives. Promotions, at a wide range of firms including (surprise surprise) consulting firms, are usually contingent on earning an MBA. Yet, the training involved seems to be widely disparaged as holding very little real utility – at a training session today about core business frameworks, the manager leading the session even made a joke about how the new staff ought to ignore those silly b-school interns “who think they know everything when they really don’t know anything.”
While the statement was certainly made in jest, it appears to be a widespread idea — yes, those individuals who had little financial background will learn some things like financial accounting and the coursework touches on some business basics like benchmarking strategies and cost accounting, but it’s widely perceived that an MBA only gives you two things:
- Three letters which somehow increase your salary despite the wide range of program / candidate quality
- Networking opportunities
Make no mistake — the benefit from #2 can be quite substantial and quite relevant. But, its hard to believe that the value of the MBA comes from the coursework or even the networking. Instead, it’s much more logical that, like one’s choice of college, the real value in the MBA comes from the signal: the difficulty of getting in (especially when the school is a well-regarded business school), the likelihood that one has had previous experience in business, and the fact that one is dedicated (b-school is expensive and time-consuming).