What They Don’t Teach You in Business School

Last week I talked to a group of college students in a portfolio management class at one of the local universities here in Michigan. The topic was open-ended so I wanted to share with them a few of the things I wish I would have learned in school that weren’t taught or apparent to me at the time.

Here are a few things I think are overlooked at most business schools:

How to deal with people. It always amazes me how much emphasis schools place on knowledge, theories, and models, but they rarely focus on the one skill that everyone needs to master — dealing with other people. Ninety-nine times out of a hundred I’d rather work with a B student who has social skills than an A student who has no idea how to communicate or work with other people.

Theory requires context. One of the students asked for my thoughts on the efficient frontier and mean-variance optimization. I told them that the general idea behind these theories has been very helpful to the portfolio management industry in a number of ways. Diversification and the idea that adding together investments that behave differently in a portfolio is an important concept.

But you can’t take these types of models literally. Correlations and market relationships are constantly changing. Nothing is stable and the past isn’t a perfect window into what’s going to happen in the future. The efficient frontier shows you the best risk-adjusted returns from a historical dataset. It can’t tell you what the perfect asset allocation will be in the future.

Models and textbook theories can play a role in building your knowledge base, but they never tell the whole story. Many people make the mistake of taking them at face value without thinking through the real world implications. No model is perfect, so the majority of the time what really matters is the interpretation by the end user.

Read, read, read. I must have wasted thousands of dollars on textbooks in college. It’s not that textbook knowledge isn’t helpful, but looking back on it now I’m shocked at how few books I was assigned to read outside of academic textbooks. There are so many great books out there on business, investing, history, leadership, psychology, etc. that cost a fraction of what students spend on textbooks and contain far more useful and practical information.

The majority of my own learning experience came after college from reading as many books as possible. I wish I would have started this process earlier. I don’t understand why more colleges don’t simply do away with most textbooks and allow students to learn from some of history’s great thinkers, investors, business leaders, economists and authors. You can learn more from Warren Buffett’s collection of annual shareholder letters (which are available online for free) than what they teach in best MBA programs in the country. It boggles my mind that I was never required to read these when I was in school.

There’s no such thing as a perfect business model. The Harvard case studies about successful businesses were always interesting, but what they failed to mention is the number of companies that tried the exact same strategy and failed. Successful companies usually have a wonderful product, leader or strategy, but also a heavy dose of luck. No one tells you about luck when you’re going to business school because it’s not quantifiable.

Good luck with those macroeconomics courses. The majority of what I learned in my econ courses in college has been disproved in the past decade or so. Everything we were taught about monetary policy, interest rates and inflation was wrong. But it sounds intelligent in a textbook, so there’s that.

Incentives matter. The first place to look when trying to figure out someone’s motivation for doing something in the business world is their incentive structure. Incentives shape outcomes more than most would like to believe. Pay attention to incentives and you’ll be able to understand the majority of the actions people and businesses take, whether they’re rational or not.

Sales. Most people have a negative attitude towards selling. The first thing that comes to mind for most is a sleazy used car salesman. But you can never escape sales in the business world. Every business is selling a product or service. And in many respects, to get ahead you have to learn how to sell your own accomplishments and skill set. Persuasion is an under-appreciated, but very important in getting ahead in business.

Psychology and human behavior should be prerequisites. In a recent interview, I said if I had to do it all over again I would have studied psychology in college. I was never required to take one psychology class in all of my years of undergrad or graduate school. Maybe this is because there’s no formula, equation or proof about human behavior, but I think this is a huge mistake. Thinking, Fast and Slow should be required reading for anyone going into business.

There are no classes called ‘Investing is Hard.’ This was probably the main message I tried to convey to these students because they were in a class that required them to invest real money on behalf of the school through their class. No one ever really tells you how hard it can be to earn excess returns in the markets. At that age, you’re worried about creating the most precise Excel model you can to accurately value a business. Figuring out that successful investing is not easy is actually one of the first steps you have to take to become a better investor.  

Further Reading:
The CFA vs. MBA Decision
There’s No Such Thing as Precision in the Markets




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What's been said:

Discussions found on the web
  1. Hannah Rounds commented on Oct 14

    Yesterday, a newer analyst asked me if I could help him with the business interpretation of his model. As we looked through the results (with impressive statistical significance given what he modeled), I said that in my judgement, that people would usually misinterpret the model, and that I would revert to a simpler technique.

    It’s sort of devastating to spend weeks building something great only to recognize that the greatness is going to be misused. It’s tough to love econometrics and still recognize that most of the time a two variable line chart is the most effective way to make a decision.

    • Ben commented on Oct 14

      Very true. Difficult to grasp the whole garbage in/garbage out concept when you’re just starting out. You just want everything in excel to make sense of the world. Simplifying and thinking in terms of probabilities is the key in my mind.

  2. LPL Advisor commented on Oct 14

    CLASSIC Ben – Brought back memories of AP Econ… What I was taught was an “Alternate Reality”…
    Thanks for the Reminder – Be a Lifetime Learner

    • Ben commented on Oct 14

      The problem is most of my econ profs were more concerned with getting published or figuring out how to write a textbook that they didn’t really care too much about real world application.

      • Chris commented on Oct 15

        That’s why I find value with having a foot & 1/2 in the real world while I teach college economics at night.

        • Ben commented on Oct 15

          Nice. Those were usually the profs I enjoyed the most.

  3. Robb Engen commented on Oct 14

    Hi Ben, I agree 100% with your comment about reading more. I’ve learned more about leadership, business, behaviour, etc from the many books that I’ve read post-college. The only relevant book that was required reading in college was Covey’s 7 Habits.

    My question to you is, how did the business students react when you said all of this?

    • Ben commented on Oct 14

      It was pretty interesting. They peppered me with questions. I think it was actually eye-opening for many of them. It seemed like they appreciated the context. They all asked for book recommendations so hopefully they’ll take the advice and run with it.

  4. Mark Massey commented on Oct 14

    Two points stood out to me in this post:
    1. Every time I read the phrase, “risk-adjusted returns”, it makes my skin crawl. It is total BS to me. I do not and will never acknowledge that volatility is risk. This phrase is a euphemism for, “My returns are not very good but my values moved around less last quarter or year than did the average returns.”
    2. Regarding college and graduate required textbooks, if the schools and professors ever acknowledge that the content of textbooks is not worth reading and using, they will not be able to charge $50K per year in tuition. May not be able to keep their jobs!

  5. Minh Tu commented on Oct 14

    A college education is mostly worthless. The problem is not limited to business
    school. I had near perfect GPA in computer science yet my colleagues with
    lower grades are better than me at developing software.
    When I studied biological science textbooks to help my investment in biotech, I
    could only find part of the knowledge needed. There are lot of useless subjects
    covered at length such as names of all the bones in human body, names and
    shapes of animals and plants, the evolution of teeth, the development of
    chicken embryo, etc. just because it is easy to test if the poor student could
    memorize all this stuff.

    • Ben commented on Oct 14

      I think one of the things you realize is how pointless it is to just memorize things for tests. That has nothing to do with knowledge. That’s interesting how the grades didn’t translate into developing software. Why do you think that is?

      • Minh Tu commented on Oct 14

        I think nobody knows how to measure aptitude or skill correctly. IQ test or SAT is too math centric. For the same
        reason your economics professor like to crank out papers
        full of mathematical formula, to gain respect computer
        “science” needs to have chockful of math. I am good at
        math but it has only some partial relation to the actual field.

        • ST commented on Oct 14

          Minh, you’ll be happy to hear there is a burgeoning trend in which firms now no longer recognize post-secondary degrees in the hiring process (e.g. Ernst & Young).

          E&Y did a study of their own employees and found there to be almost zero correlation between having a degree and future success within the company.

          Bill Gates is a drop-out, after all. 😉

  6. Michael Hwan commented on Oct 14

    I 100% agree. The classes I took that required students to analyze social group dynamics are the ones I continue to use everyday (Behavioral, Industrial-Organizational, and Social Psychology).

    • Ben commented on Oct 14

      It’s amazing how many different areas of your life those topics become applicable for.

    • Zaphod commented on Oct 16

      Social psych was probably one of the most useful courses I’ve ever taken. Also easy to learn when things are presented in a manner you can relate to, “so…you’re in a bar”. Much fun.

  7. Zaphod commented on Oct 14

    Excellent. I 100% agree with incentives, which kind of dovetails with your outside reading idea which is also very true. It was probably the freakonomics books coupled with my psychology courses (and you know, life experiences) that so changed how I interpreted how others would act. Maybe I became cynical but it seems to work best if you consider what the other parties incentives are completely removed of any emotional regard to your side of the transaction, because they dont have that blindside impacting their decision making. Sadly, its extremely useful for predicting behavior, as most people are far more self interested than a more reasonable person might project.

    I try to tell my friends this simple trick but they just dont get it.

    • Ben commented on Oct 15

      This is true. It’s always good to remember this when people do crappy things to others. It’s usually just a reflection on them, not you.

  8. Zekester7659 commented on Oct 15

    Incentives: really, this can be generalized to apply to the actions of all people in all circumstances.

    Dealing with people: this is really not a teachable skill, at least to a large extent – you got it or you don’t based on how you were raised, your experiences, your genes.

    Theories: mostly agree. I would say that b-schools can get too in-the-weeds theoretical, and miss the forest for the trees, and fail to realize that the real world is not academia full of theoreticians, and that more basic factors overwhelm any theory.

    • Ben commented on Oct 15

      I don’t totally agree with the dealing with people thing. Sure, some are naturals at this, but you can definitely improve on this. Tim Ferriss had has a good quote that goes something like “your success can be measured by the number of uncomfortable conversations you’re willing to have in life.”

      • Zekester7659 commented on Oct 15

        I said to a large degree. Maybe “large” is too strong, but in my experience some people are naturally good at it and some not. For sure can get better, but some folks, for whatever reason, are almost hopeless … probably comes down to character / honesty / empathy.

  9. ST commented on Oct 15

    I’ll have to say that “Incentives” and “Sales” are highly correlated.

    For example, one firm I worked for held a surprise month-long sales contest once a year ( no one knew which month it would be). Advisors were paid double commission on all sales. The contested month routinely saw sales spike before returning to normal levels.

    As well, it was/is against regulations for advisors to sell investment products using commission levels as a client suitability factor, yet the products with the highest commissions were routinely filled first and fastest.

    A lot of people are being sold stuff they don’t need. The investment *might* be okay for them, but it’s perfect for the advisor. Remember the thing about focusing only on things we can control? The advisor has no control over the investment, but he can exert control over the investor. If you really think most financial advisors are in it for your benefit…time to think again.

  10. oleditor commented on Oct 15

    What I get from Ben’s column, as well as many of the comments, is that we have gotten so far away from old fashioned liberal arts education — whose main goals were to teach critical thinking and develop the all-around person — that higher education has lost its real life relevance. I also assume that many of those joining the discussion have, or at least are familiar with, undergrad business curricula. We should never have moved business education to the undergrad level — a good MBA program can do it all in a year or so. I have the MBA, and it is useful, but I also have three other unrelated degrees. All have been helpful, and at the age of 76, I hope I am still adding to my inventory of knowledge and understanding of the world. Do psychology, history, English lit, hard science, whatever at the undergrad level, then take a master’s for a dash of applied knowledge. Unfortunately, the consumers of higher education (primarily the parents), think of a bachelor’s as a union card. So higher ed has responded by meeting the market. We can do better.

    • Ben commented on Oct 15

      Very true. Specialization for the sake of specialization isn’t all that helpful if you don’t know how to apply it correctly. I’m a huge fan of Charlie Munger’s latticework of mental models approach.

      • RealityIsComplicated commented on Oct 16

        If you think carefully about Munger’s views on education, college, and so on, and use any one of many common definitions of “liberal arts education”, you’d reject this comment.

        Munger is extremely big on math, science, and engineering and disparages liberal arts educations associated with any and essentially all universities in the US constantly.

        The reality is liberal arts tend to suffer from confirmation bias and have few useful mental models associated with them. (I say ‘useful’ in the sense of making predictions and not being a patsy.)

        Munger does think there is value to learning history, psychology and economics (some mixture of this might be considered liberal arts), but you have to be choosey in these areas and what’s taught in University is largely junk. That’s the Munger view anyway. He has never, to my knowledge, said anything remotely positive about studying English lit.

        The farther you get away from science, the more Munger would trash it.

        A few Mungerisms are in order:
        “The interesting thing is you could go to the top business schools and none are studying and teaching what Warren has done. There’s nothing nutty in the hard sciences, but if you get into the soft sciences and the liberal arts, there’s a lot of nuttiness, even in things like economics. Nutty people pick
        people like themselves to be fellow professors. It gets back to what Alfred North Whitehead talked about: the fatal unconnectedness of academic disciplines.”

        “There’s a lot wrong [with American universities]. I’d remove 3/4 of the faculty — everything but the hard sciences. But nobody’s going to do that, so we’ll have to live with the defects. It’s amazing how wrongheaded [the teaching is]. There is fatal disconnectedness. You have these squirrelly people in each department who don’t see the big picture.”

        When faced with this, a lot of people go into denial or start playing with definitions, rather than downgrading their belief that liberal arts educations are ‘good’. A very un-Mungerish thing to do.