At least since the Enron debacle, graduates of master of business administration (MBA) programmes have come in for criticism for lacking an adequate ethical grounding. These concerns were renewed by the current financial crisis, which began on Wall Street and spread worldwide: Again, MBA training was held to be partly at fault. In this case, the additional shortcoming identified was an over-reliance on models and analytical constructs that were inadequate in the face of overwhelmingly complex systems of financial instruments and institutions.
One critique of decision making methods has been that what really matters are exceedingly rare events (“black swans”, in Nassim Taleb’s metaphor), and these cannot be predicted by models and number crunching. This line of reasoning is not only nihilistic, but seriously incomplete. The question of what enables or leads to good decision making is much broader than the problem of black swans.
Historically, modern decision theory developed in response to practical problems of strategy, especially in warfare, and the analytical approach has proved itself time and again. MBA programmes spent decades upgrading their analytical content, and more generally creating a firmer footing for managerial decision making. There is no going back from that progress. Indeed, no one would recommend that doctors abandon scientific methods, despite their limited ability to diagnose and treat many ailments.
The challenge of how to make good business decisions is also more central than the problem of ethics. Certainly, lack of a moral compass can lead to devastatingly awful outcomes, no matter how efficient the decision making: The history of the Nazis will always remind us of the primacy of humane values. Yet, the sense is that many of the business problems that arise in practice are not the result of evil, but simply of poor judgement in complex situations. Good people making bad decisions is pervasive, in a way that evil is not.
Indeed, when I have talked with Silicon Valley executives, in the course of developing a new management school that would serve the needs of that uniquely innovative and dynamic region, the major concern was not with people being evil or unethical. Nor, as one would expect in an economy created and run by scientists and engineers, was there a rejection of scientific methods applied to the problems of running a business. Instead, the executives wanted more—the ability to make rapid, accurate decisions in complex, changing environments. The perception was that MBA programmes do not provide the right type of training. Case studies, classroom lectures and stylized internships do not cut it in producing the right managerial stuff.
Executives, naturally, have insights into what kind of training is needed— basically, something closer to the real world of managerial decision making. In some cases, it appeared that what they were looking for could only be acquired outside a formal degree programme, and the MBA course would be reduced to a certification process imparting no new skills of value, merely ratifying that the degree holder had started with the requisite skill set. Silicon Valley executives often take this reasoning to its logical conclusion, favouring customized concentrated training and dismissing the MBA.
Is academic management education irrelevant then? A nice reconciliation of the worlds of formal analytical training and experiential learning is in Malcolm Gladwell’s book Blink, which provides some deep insights into our brains, and how they process information for decision making. Blink examines how we are often able to make accurate split-second decisions that are superior to those that come from painstaking analysis of mountains of information. Gladwell’s examples often come from military or civil emergency situations (crime, health and fire), where there is little or no time for analytical thought. Silicon Valley business is not quite like that, but it is certainly more complex and rapid than the old world of tight oligopolies and little innovation.
There are several conclusions worthy of note from Gladwell’s synthesis. First, the two decision modes use different parts of the brain. Second, neither decision mode dominates all the time: sometimes thinking does better, sometimes “blinking”. Third, snap judgements are often best when the problems are very complex—though biases can also systematically distort decision making in such cases (see Gladwell’s example of women classical musicians and audition procedures). Fourth, “blink” judgements are best when the decision maker has accumulated expertise. Finally, this expertise comes not only from life experience, but also from study and training.
So there is a clear lesson for where management education should improve. Certainly, it is useful for MBA programmes to make their students more aware of social responsibilities and the need for professionalism. But there will be an even greater benefit from producing graduates who can just make better business decisions. Understanding the varied processes of human decision making, and how they can be sharpened in multiple dimensions, is the key to achieving that goal.
Nirvikar Singh is professor of economics at the University of California, Santa Cruz. Your comments are welcome at eyeonindia@livemint.com