Signaling and the Scam School

The whole IIPM brouhaha raises an interesting question: does the existence of a scam school mean that a free market isn’t working? Does the government have to regulate schools to make sure they are not bogus?

I believe markets a self-regulating to a large extent. Parents and students will have a strong incentive to do good research on any educational institution before attending. We would expect that a scam school would lose students over time and eventually fail. I will add that making demonstrably false claims in newspaper advertisements could and should be considered fraud, and the government has a role to enforce these laws.

However I had another completely different thought; one that might bother some people if they took it too seriously. The idea is that maybe scam schools provide a service by sorting students into different quality categories.

The idea is related to Michael Spence and his Nobel-prize winning idea that education is partly a labor market signal. Imagine that unlike engineering, an MBA really doesn’t impart any useful skills (which is possible). Maybe running a business is mostly common sense. But who has common sense? It isn’t at all common. The idea of “signaling” is that an MBA reveals inner qualities of the students such as common sense and organization that are useful in running a portion of a business. Therefore, those who do well in a reputable business school “signal” their abilities and can command a higher salary than other people of equal - but hidden - ability. They earn more because everyone knows that they are special.

Now maybe there is a role for an institution to signal the other end of the ability spectrum. Suppose there are many people who are bright and engaging and somehow lack all common sense. These people might like to run an office but lack the ability to do so. This is the problem: how do managers know before putting someone in a position of responsibility that someone will do more harm than good? Wouldn’t it be nice if foolish people somehow acquired negative signals that could tip off the manager that this person is exactly the wrong type of person to run a business?

So the scam school enters the picture. It advertises heavily with obviously inflated claims. On its website you see lots of things that make you suspicious: no faculty list, unclear course description, inflated claims, etc. Anyone with common sense would avoid such a school. But some people will go there. Those people will list the school on their resumes and managers will know whom not to hire. Perhaps, over time, some of these people will guess that their “business school” experience is more of a handicap than an asset, but the lack of common sense that lead them to this school will prevent them from really understand this.

These signals are useful in the labor market because they allow for better sorting between people and tasks. People without good business sense will not run businesses, and this will save companies from costly mistakes.

Here is an excerpt from Chandrachoodran’s blog about his experience with the infamous IIPM. He applied there and felt that he had done poorly in the interview and in the examination, but he was offered a spot and told to make an immediate decision to accept or refuse.

I refused. Next day, somebody calls me up and gives me a lecture on how IIPM education is valid world-wide and why I should quit my current job (I was a trainee writer in an agency) and improve myself. Of course, they would also be willing to let me pay my fees in two installments.

Reason prevailed and I continued being a trainee writer, going on to become a respected member of that organisation.

Now, I say this for two reasons. One. IIPM is as much interested in transparency as the Playboy reader is in the stories.

Second is that that incident told me that IIPM is not worried about their student’s academic merit and talent. They just want him/her in. I say this for I know I was never MBA material. One, my CAT score that year wasn’t encouraging. (My Quant score was to blame - I ain’t an expert in math). SO I am not sure how well I would have performed in the IIPM test.

Two, my contribution to that GD was zilch. I remember this well. For I am not a follower of cricket and wouldn’t know what globe changing effects a match between India and Pakistan would have.

I say this without hesitation. I would have sucked big time in an MBA course. I don’t have the ruthlessness that I see in friends who are at IIMA and ISB. I do know I am clever and creative. But that doesn’t translate to being a good MBA student. And I am sure, IIPM would have known it. Yet, they wanted me to join their course.

Why? Simply put. Rs. 7 lakhs or whatever their course fee is.

I have been viewing everything IIPM does since that day with a suspicious eye. And my doubts have been proved.

Chandrachoodran had the sense to know that he really wasn’t MBA material but some people don’t know that. They end up going to the scam school and acquiring a worthless degree.

But if there are foolish students who attend scam school, aren’t there foolish managers who might hire them? Indeed there might be. But these managers are probably foolish in many dimensions and will almost surely run their businesses into the ground over time. If they are allowed the opportunity to make a foolish choice in hiring a person to run a particular operation, he will hasten the demise of his business. This means that resources that were trapped in an inefficient operation would be freed to go to more efficient operations.

But if there are foolish graduates who go to work for foolish managers, might there not be foolish consumers who buy their products? Indeed. An economy of fools would not work so well.