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business schools and the economic crisis

This was bound to happen – an all-out Texas cage match between the hards and the softs in business schools. The question motivating the tussle (in a Harvard Business Review forum) is whether business schools have any responsibility for the current economic crisis. The softs say yes, we have focused too much on training in financial analytic skills and have ignored ethics, values, and leadership skills. The hards say no, business schools are not incubators for bad moral decision-making – people come to that all on their own. On the soft side, Joel Podolny and Bob Sutton lead the charge. Steve Kerr and Steve Kaplan respond.

Much of the debate, at least between Bob and Kaplan, centers on whether economics education in b-schools encourages self-interested behavior and whether this self interest necessarily translates into opportunism. Jerry Davis, who we like to quote here at orgtheory, offers some words of wisdom in the comments section.

Steve Kaplan raises good points that even an amateur sociologist such as myself can appreciate. Self-interest per se does not bring about bad behavior on a large scale: it is the institutions that channel self-interest that matter. And as we have seen recently, financial services have been transformed over the past three decades in ways that opened up some socially destructive possibilities. To build on Steve’s example: self-interested investment bankers behaved rather differently when their firms were organized as partnerships because their wealth was tied up in the reputation of the firm. This in turn guided partners (and would-be partners) to take the long view, because a quick buck on a bad deal did not outweigh the present value of the firm’s reputation.

Conversely, I doubt that Bear Stearns would have behaved much differently even if they had recruited heavily in schools of social work. Altruists don’t last long in investment banks.

I like this line of thought. No matter how you’re trained, if the institutional system is set up  to reward and encourage a particular behavior, that behavior will be quite prevalent. Yes, this assumes that people are naturally self-interested to an extent, but it also assumes that what people perceive as in their self interest adapts to the institutional conditions of their workplace.

Peter Klein offers his own response to Bob Sutton here.

Written by brayden king

April 8, 2009 at 3:02 pm

Posted in uncategorized

10 Responses

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  1. Jeez it’s like blood & organ donation vs markets all over again. Should we rely on people’s self-interest? Or cultivate their virtue? Those are obviously the only choices.

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    Kieran

    April 8, 2009 at 3:05 pm

  2. Kieran is correct, of course, we don’t have to choose between solely relying on self-interest (i.e. improving institutions through improving incentives) and cultivating virtue. But I think it is well worth discussing and debating how efficient and effective these and other strategies are likely to be in achieving our goals.

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    Michael Bishop

    April 8, 2009 at 6:07 pm

  3. There is some social psych research showing that learning economics makes you more likely to free-ride, net context. E.g. http://www2.gsb.columbia.edu/faculty/rfisman/forbespaper.pdf
    Those kind of studies never thoroughly convince me, but there is something seductive about the idea that our teaching actually matters, and that when you teach students that rational people free ride given certain institutional failures (no enforcement mechanisms) then perhaps that does make them more likely to do so (and thus “perform” homo economicus).

    But these studies are always net of context, so I don’t know that they really detract from Jerry or Brayden’s point that much.

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    Dan Hirschman

    April 8, 2009 at 11:13 pm

  4. Dan, I find those studies cute, but ultimately ephemeral. As I noted here, to show that teaching economics is the primary cause of corporate corruption or business failure or whatever, you need some cross-sectional or time-series analysis. I mean, economics (particularly, Sutton’s whipping boys agency theory and transaction cost economics) has been in the MBA curriculum for what, twenty years at most? What, then, explains the corporate corruption and business failure experienced since, you know, the beginning of recorded history? What about countries where economics plays a smaller role in business education, like India or China? Do they manifest less greed?

    My point is that the claims of the econo-bashers are testable hypotheses, but these guys have no interest in testing them. They’re too busy shouting their conclusions from the rooftops.

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    Peter Klein

    April 9, 2009 at 2:12 am

  5. […] “Business schools and the economic crisis” – […]

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  6. Perhaps, in talking about institutional influence, we DO need to include business schools rather than focus merely on industry and firm.

    Regardless of whether what we teach matters or not, the business school you attend influences your expectations and career choices. Students who get into a top 10 B-school have alternatives not necessarily available to grads of any old b-school. Thus, you’re going to hear a lot more about I-banking, hedge funds, private equity, consulting, etc. The institutional environment seeds certain types of expectations in the students over their tenure when 40% of Wharton grads go (or rather WENT) to Wall St and 30% of Kellogg grads go into consulting, for example.

    Having said this, I acknowledge we have counterfactuals for each school – those who go on to start non-profits, etc. However the outliers do not make the rule. My point is, if you go to a top B-school expecting to make a lot of money in your first job and use it as a springboard to rule the world, WHY would your outlook on money and self interest CHANGE when you get into industry? Maybe it’s not the coursework, maybe it’s the mindset. As B-schools we own a portion of that.

    At the same time, I think this conversation tends to paint all B-schools with the same brush. Only a relative few schools are sending large numbers of grads into the industries we’re bashing…

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    Brandon

    April 9, 2009 at 8:10 pm

  7. It’s interesting to see “hards” defending the b-schools and “softs” blaming them. It seems to me that, over the last 20 or 30 years, business schools have become “softer” (as seen in the growth of leadership studies and organization theory). In fact, I think there is an argument to be made that valorizing “leadership skills” over, well, basic math, is part of the problem (i.e., the financial crisis).

    I don’t know enough about the relative dominance of the various disciplines, whether in the b-schools or in the business world, but I do think that that there has been a general denigration of the so-called “reality-based community”. Some say that was Karl Rove’s epithet for people who proposed to actually understand and evaluate the Bush doctrine (rather than just get on board with the empire). These are also the people who aren’t quite convinced that “enactment” works as advertised.

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    Thomas Basbøll

    April 10, 2009 at 7:41 pm

  8. To me, the B-schools do deserve some of the blame, but it is not largely in the arena of “soft” vs “hard” issues as presented in the HBR debate.

    I think rather it is a question of their role in promoting the ideologies of financialised capitalism and deregulation.

    This is partly through their research functions and employment decisions and perhaps less through their day-to-day teaching.

    Obviously, some of the day-to-day teaching and “industry collaboration research” around various financial instruments had some holes in it.

    However, I would also finger the absurd lack of critical analysis of simple quantitative models across most B-school courses, along with the shoddy state of teaching about risk analysis and decision making for enabling the bubble.

    Of course, when the bubble arises (as it did) out of corporate structures and misaligned incentives, just making people smarter about risk and models full of numbers doesn’t fix it. However, I do think that it contributed to the ease with which many put various dangers out of their mind.

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    Metatone

    April 12, 2009 at 3:02 pm

  9. […] Education and Economic Theory Posted in Uncategorized by Mike on April 15, 2009 From Orgtheory, there is “an all-out Texas cage match between the hards and the softs in business schools. […]

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  10. Well, I agree with softs about what they saying that focusing on financial analytic training is too much, rather than doing this if we give some information & training about ethics, values, and leadership skills, It would be much useful for future leaders in business industries. This is my point of view.
    _____________________________
    student International Business School.

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    Jason

    September 23, 2009 at 5:34 am


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