The real reason MBA graduates make worse managers

A new study from the National Bureau of Economic Research is causing quite a stir. It provocatively suggests that executives with MBAs oversee a decline in employee pay while failing to increase company profits or sales. Its lead author is MIT's Daron Acemoglu, an economist whose work cannot be ignored.

Acemoglu and his coauthors point to "practices and values acquired in business education" for these managerial shortcomings. Business school professors will find this conclusion disturbing and assert that this is not what they teach. They would argue that they teach future leaders to grow sales and profits, and that when they do, they will be able to pay their employees more.

But the study's depressing findings are unsurprising to me as a former longtime dean of a prominent business school. That is because embedded in many of the tools MBA students are taught is the doctrine that sound business decisions are based on rigorous data analysis. 

By the time they graduate, lots of MBAs feel that a decision based on anything else is beneath them. They are never told it in that many words. But after they have been taught data analytical methods in every course for every conceivable problem, they get the point.

These data-obsessed MBAs optimize anything they can analyze — as if the future will behave like the past, including employee costs. They do not imagine that grinding costs down by chopping head count and suppressing wages will hurt performance. And they believe the cuts are justified because they are based on rigorous analysis.

The same numbers-driven approach hurts their ability to grow sales and profits. In relying so heavily on data, they are implicitly assuming that the future will be identical to the past. It usually is not.

The other major teaching method in business schools, the case study method, is also backward-looking. Students read a story of a historical business dilemma and try to figure out what the boss should do. 

This might seem as if it takes creativity and imagination, but the professor is relying on a teaching note that describes a precise learning pathway. The professor carefully guides the class to the predetermined answer during what masquerades as a free-form case discussion.

In the real world of business, the future is notoriously different from the past. There are no predetermined answers. Steve Jobs — who never got an MBA, but did enjoy calligraphy — understood this. 

So do Brian Chesky and Joe Geggia, who were classmates at the Rhode Island School of Design before cofounding Airbnb. And so does Janice Bryant Howroyd, founder of The ActOne Group, a billion-dollar staffing company. She majored in English.

Perhaps this is one reason for the pushback in MBA programs on the absolute dominance of science over imagination. MBA students are clamoring for design content to be imported into their programs, which some schools are doing — including Darden, MIT and Rotman. 

In these business design courses and co-curricular activities (taught mainly by non-tenured stream faculty), students are taught to use ethnographic techniques to develop deeper customer understanding, to listen to diverse viewpoints to broaden their range of creative possibilities, and to use rapid iterative prototyping to fine-tune customer offerings.

The notion that rigorous decision-making must always be based on data analysis is one example of a model — a framework or way of thinking. 

This model took hold in 1959, when business education went all-in on science in response to harsh criticism from studies by the Ford and Carnegie foundations. Sixty-three years later, the model still dominates. The result is rigorous stupidity.

Ironically, the father of Western science himself, Greek philosopher Aristotle, was clear on the limits of his data analytical methodology. 

It should only be used in situations in which the future will be identical to the past — as in the physical world, where the force of gravity or the atomic weight of copper does not change. 

Were he alive today, Aristotle would be appalled that MBA students are being taught to use his methodology in territory way outside its proper domain.

The point is not only that it is time to retire the model that demands universal application of data analysis, but that it is crucial for all business leaders — not just MBA students — to avoid being captured by their models and instead cultivate new ways of thinking.

Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.