by Rick Nason, PhD, CFA
Partner, RSD Solutions Inc.
As a university professor I always start to get excited again this time of year as fresh new batches of students are about to arrive on campus. Another cohort of great minds to fill with relevant knowledge – or so we tell ourselves as we start preparing our class syllabus.
One of the strange characteristics that we note – or at least in business schools, although I suspect it carries over to other faculties as well – is that the great students on average underperform the average student later in life in their careers. Of course there are always exceptions to this – some great students have outstanding careers. Typically however the most gifted academically under-perform their more mediocre peers.
There are a couple of possible explanations for this. The first and most obvious is that B-Schools teach and measure on all the wrong topics and metrics. I believe this is true and have a forthcoming academic paper titled “Business School Myths” that outlines my arguments why this is so.
A second and related explanation is that business schools teach great knowledge, not relevant knowledge. Compounding this, students from the first days of kindergarten are rewarded for focusing on great knowledge not relevant knowledge. (“Great” meaning both the great ideas –dead poets etc. – as well as the great volume of material that needs to be covered to satisfy the standard curriculum which is designed by a committee – insert your own design by committee joke here.) What is “great” in terms of ideas is rarely questioned, other than by the kindergarten and primary student, and they are told that they are too young to understand. (Anyone who needs to relearn how perceptive kids are needs to read the comic strip Frazz.) For instance we continue to teach Shakespeare without question. I have nothing against Shakespeare (in fact I rather like old Will’s writing and themes), but should we unquestionably continue to teach it simply because that it was taught last year? Have there not been any relevant (more relevant) plays or stories written since?
It seems to me that risk management is also trending towards “great” versus “relevant”. Regulators, shareholders, rating agencies, Boards, and others all want to see evidence of “great” risk management in place. Here too “great” has two meanings; (1) what is considered the orthodox risk metrics and (2) a lot of it. But does anyone ask if the risk management is relevant?
Getting back to the point about great students underperforming on average the more mediocre students, it is interesting to ask the question; “Does great risk management, on average, underperform mediocre risk management?” If “great” means traditional and volume, and not relevant, then I believe that “great” risk management will indeed underperform mediocre but relevant risk management.
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