The making of an investment banker: Macroeconomic shocks, career choice and lifetime income
From the Briefcase: Research produced by America's Best Business Schools
Authors: Paul Oyer (Stanford Graduate School of Business)
Status: Working paper (PDF), National Bureau of Economic Research
Summary: M.B.A.'s fretting about finding a job after B-school really do have something to worry about. A new paper finds that lifetime earnings for M.B.A.'s are highly dependent upon whether they graduate into a bull or bear market.
Paul Oyer backs away from using the word luck. Nevertheless, his research shows that many young M.B.A.'s who go into investment banking might just follow that career because of happenstance as much as a die-hard allegiance to Wall Street. And those who graduate during a bear market may never get the chance later to start a Wall Street career—a fact that dramatically cuts down on their lifetime earnings.
"It always struck me that being in the right place at the right time was important in career paths," said Oyer, an associate professor of economics at the Stanford Graduate School of Business who studied the long-term career choices and salaries of more than 35 years' worth of the school's graduates. From surveys conducted in 1996 and 1998, Oyer concluded that random factors play a large role in determining the kinds of jobs that M.B.A.'s take upon graduation. Specifically, the proportion of graduating M.B.A.'s who manage to get hired into lucrative investment banking positions shrinks or expands depending on how well the stock market is performing in a given year.
For example, more than a quarter (26 percent) of Stanford M.B.A.'s who graduated two years before the stock market crash of 1987 became investment bankers. But just 17 percent of the M.B.A. graduates two years after the crash took that career path. And the difference in payoff was huge. Based on the salaries provided by thousands of M.B.A.'s in this self-reported survey, Oyer calculated the present value of the lifetime income of an M.B.A. who went into investment banking to be $2 million to $6 million higher than that of an M.B.A. who went into a nonbanking career.
"Thus the classes of 1988 and 1989 could expect significantly lower lifetime income due to the timing of their graduation than the classes of 1985 and 1986," said Oyer.
Oyer also discovered that M.B.A.'s who go into investment banking—a category in which he includes money managers and venture capitalists—tend to stay there for the long term. For example, in the first few years after receiving their M.B.A. degree, 5 to 10 percent of the people in investment banking leave, but attrition slows significantly after the fifth year and the percentage of a typical graduating class that works in investment banking does not change significantly after that point.
Thus, although it might seem intuitive to believe that there are a limited number of M.B.A.'s who have a natural aptitude for investment banking, there's no evidence to support that. Instead, the significantly greater numbers of M.B.A.'s who go into investment banking during bull markets are just as dedicated to banking in terms of how long they stay there and how much money they make.
"This tells me that there is a deep pool of potential investment bankers in any Stanford M.B.A. class," said Oyer.
Another of the surprises Oyer found during his research is that M.B.A.'s are not hopping in and out of investment banking in search of the perfect job. "The idea has long been that M.B.A.'s change jobs all the time. But what this study shows is that they are not jumping in and out of investment banking. It's pretty sticky. Once you're there, you tend to stay; once you've started down another path, you're not likely to move to a Wall Street firm."
The research also suggests that bull markets might discourage entrepreneurs. "One question you would naturally ask [is], if in bull markets more people go into investment banking, what are they not doing?" said Oyer. "And because there are a fairly limited set of things that M.B.A.'s do, there's some evidence that when bull markets move people onto Wall Street, it takes away from consulting and entrepreneurial careers."
One thing that the study does bear out is that graduating M.B.A.'s are correct in perceiving that general economic factors in the year they graduate will have profound long-term implications for their careers.
"Every year, our students get very anxious about the state of the job market. I always thought we—because I was the same way when I was finishing school—were being silly," said Oyer. "But as it turns out, we had pretty good reasons to be worried about the state of the job market, as it would affect a lot of us for a long time to come."