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. I've changed some names and figures for privacy reasons.
I caught up with a friend, Peter, who is a partner at a private equity firm the other day. He was beaming about how their youngest son got into U Penn after letting him take a gap year after high school.
“Getting into college these days is like playing roulette! You really never know where you're going to get in!” he said. “My son got rejected from everywhere, except his top choice. Go figure!”
I congratulated him because getting into an Ivy League school nowadays seems like mission impossible. He then went on to say one of his associates was leaving to go to Harvard Business School.
I asked him why and Peter said the associate wants to explore venture capital or fintech after graduation. That sounded fine to me at first, but not after my friend explained some more.
An Illogical Reason To Go To Business School
“This associate of ours is awesome! Everybody loves him and he does great work,” Partner Peter explained. “He went to a state school, worked for two years at Morgan Stanley, and then we hired him two years ago.”
“I don't understand why he's leaving,” I responded. “Couldn't he just stay on and continue to ascend at your firm?”
“Yes, we'd certainly give him a great chance. But he wants to explore new things. And also, these kids who graduate from Harvard Business School and the likes have lots of options open to them.” Peter responded.
I then asked Peter how much his associate is going to make this year at age 27.
“About $600,000 all-in, including some of his carry.”
Whoah! 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 sectors where you can easily make over $1 million a year.
The Opportunity Cost Of Going To Business School
I understand the desire to go to business school if:
- You want to change careers
- You're stuck in a dead-end job you don't want to do
- You want to boost your earnings power because it's currently so low
- You're financially secure and need a two-year break to find something new to do
But you do NOT give 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 foregone salary plus $115,000 of tuition.
If the associate were to ascend to senior associate, vice president, and then managing director, the opportunity cost could be in the tens of millions. I've got little doubt Partner Peter makes at least $5 million a year.
However, if the associate was making $150,000 a year or less, going back to business school full-time might be more reasonable. The opportunity cost over two years would be about $415,000.
But if you're going to business school, where the goal is to maximize returns, forgoing $1,200,000+ in earnings is way too much.
The Desire For Prestige May Be A Wealth Killer
I asked Peter whether the associate has an automatic in to rejoin his firm upon graduating from business school.
Peter said, “We'd certainly give him a strong look. But there's no guarantee. We only hire one person out of business school a year.”
In other words, if the associate were to change his mind, he would probably have less than a 25% chance of getting his old job back. Those odds are terrible! The associate could also graduate into a recession and get nothing.
I told Peter the associate's choice makes no sense. Joining venture capital might seem more exciting because the associate will be looking at earlier-stage companies. However, at the end of the day, it's the same old thing. He'll be hustling to land deals, networking, and creating financial models.
That's when Peter said, “He just really wants to go to Harvard.”
Ah yes, that insatiable desire for prestige when you're young. The younger you are the less you've accomplished. Therefore, it's understandable that the importance you put on where you went and go to school is higher.
But as every older person knows, where you went to school doesn't mean anything after several years of work. It's what you do at work and the people you develop relationships with that matter the most.
More Reasons Why I'm Against His Decision To Go To B-School
Maybe I'm an odd duck because I write about personal finance. The way I view money and time might be very different from the average person. But I did work in investment banking for 13 years and I went to business school part time.
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 associate's professional future will be like.
1) No added happiness.
After you make about $200,000 – $250,000 as an individual or $300,000 – $350,000 as a cohabitating couple, you're not going to gain more happiness. At $600,000, this single associate is already earning way beyond his maximum happiness potential. Besides, we know there are plenty of six-figure income-earners who are absolutely miserable at their jobs.
2) May increase anxiety and disappointment.
If he doesn't get an equivalent-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 recent business school graduate. Remember, business school emphasizes the importance of making a high return on capital. He's not going to graduate school in the arts and sciences.
The associate could easily end up going to Harvard and getting a similar job like every other non-top-5 business school MBA graduate. Then what? Inevitability, some in his class will do very well creating more envy.
3) He will mature and have different priorities.
No successful person I know cares about where they went to college or where anybody else went to college. Instead, the more successful you are, the less you want to share where you went to college, especially if it is an expensive private university.
His life will be filled with work and life challenges, pushing his diploma to the bottom of importance. The desire to put your alma mater's sticker in your rear window will fall to zero by the time you're 40.
4) Time is very valuable.
One of the downsides of going to business school, law school, dental school, medical school, or any type of graduate school is that once you graduate, you usually need to work a longer period of time to justify your graduate school decision. The ability to retire earlier may go down.
When you're younger you don't feel time is as scarce or as valuable. You also feel ready to work forever. Sadly, we don't live forever. And if you die early, then going to business school may delay some of the things you really want to do or have.
For example, if this associate wants to start a family, it is highly probably he will have to delay finding a partner and having children for at least two years. Once he graduates, he will be supremely focused on working his hardest to make back a return, which may delay him finding love for another 3-5 years.
The Better Business School Decision
If I was the associate's trusted uncle, I would tell him to stay on at his private equity shop for one more year and defer admission. During this time, I'd recommend he save 80% of his income after taxes. He could easily save $250,000+ and live off $80,000.
During his third year as an associate, he could make the firm tell him whether he is on track to make principal or not. If he's not, then go to business school. This way, he will have saved more money and not have to second-guess his choice.
The problem I sometimes see with young folks making big bucks is that they always think they can make big bucks. Unfortunately, life happens.
I know plenty of six-figure earners who went to business school and joined fintech startups. Their hope was that they'd win the lottery ticket with equity. Unfortunately, working in fintech doesn't pay well and few make it massive. And even if these fintech companies do go public, there's no certainty they will perform well.
Everything Will Probably Turn Out Just Fine Going To B-School
Despite all the reasons why I don't think the associate should go to business school, he is probably going to do great financially. It's a free world and he should do whatever he wants!
What we don't know is that he might be completely burned out from private equity. Or he might not really like the firm or the people he is working with. If so, going to business school is going to be a wonderful time to network, reflect, and explore. He clearly has enough money after working in banking and private equity for four-plus years.
Finally, there might be some asymmetric information going on here. I know Partner Peter loves his associate because he told me. But maybe the associate doesn't really know how much Peter loves him at the firm. Some me aren't that great at conveying their feelings, especially to subordinates in a work setting.
If the associate knew how much goodwill he has at the firm, maybe he would never leave!
Readers, what do you think? Should the associate give up his $600,000 job to go to Harvard Business School? Or should he continue working in private equity so that'll he'll be making well 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 actually don't make much money?