Robert F. Bruner, Dean

“Is gridlock good—that is, should investors root against having the same political party control both Congress and the White House? Who is better for stock and bond returns: Republicans or Democrats? Most of the answers you are likely to find are propaganda or wishful thinking: many are flat-out wrong. What matters are changes in interest rates, not which party passes through the White House gates.”

– Jason Zweig, Wall Street Journal, October 20, 2012

Um…yes and no. Research does find a strong relationship between interest rates and security prices. But there is an alternative view that investors would benefit from a more nuanced consideration of the impact of politics and government on businesses, and on the securities that those businesses issue.

· There’s more to the impact of government policy changes. Monetary policy (that sets interest rates) has a big impact on the stock and bond markets; but so do many other policy levers that elected officials can manipulate, such as fiscal policy (how much the government spends), tax policy (who pays taxes, and how), trade policy (how much the government protects domestic industry), and a legion of regulations (such as labor, environment, banking, and consumer safety) that affect the ability of businesses to adapt to ongoing processes of creative destruction in market economies. The unwillingness of the Obama Administration to license new coal-burning power plants in the U.S. has had enormous impact on the coal mining industry and related industries such as rail transportation. The Smoot-Hawley Act of 1930 that erected a strong protectionist tariff was a major determinant of the depth of the Great Depression. The Sherman Anti-Trust Act of 1890 and the Federal Trade Commission Act of 1914 gave government the power to forestall anticompetitive policies, break up monopolies, and perhaps dictate industrial policy. Research has established the consequence of these policy levers to economic growth and ultimately, returns to investors. The lesson is that while monetary policy may have the most immediate impact on security prices, these other policy levers can be potent and long-lasting influences on returns to investors.

· One size does not fit all. Though we like to think of the economy and the stock market rising and falling in a visible cycle, the aggregate cycle masks enormous variations across industries and firms. Though the economy contracted sharply in the Global Financial Crisis and Great Recession, three sectors actually grew: energy, health care, and the Federal Government. The lesson is that it can pay investors to consider the impact of macro events such as changes in government policy on specific industries and firms, rather than just the aggregate stock market.

· Will history repeat itself? The research that Jason Zweig cites draws its conclusions from stock market returns between 1965 and 2008–this may yield a healthy slice of data. And as readers of this blog will note, I have been consistent in quoting Sir John Templeton, who said, “The four most dangerous words in investing are, ‘This time it’s different.’” We must pay attention to history’s lessons for today and the future. But in many respects, the present seems quite unlike anything we’ve seen before. Obamacare and Dodd-Frank promise to dramatically alter major sectors of the economy. The rise of the Tea Party on the right and Occupy Wall Street on the left suggest rising polarization among the American electorate. Massive government debts in the U.S. and abroad will linger for a decade or more and fit a tourniquet of austerity on households, businesses and governments. And the rise of China as a global competitor to the U.S. and of Islamic radicalism challenge a great deal of conventional wisdom about the geopolitical future and the global economy. In short, this moment in American political history seems like those blank areas on Renaissance maps that said, “here be dragons.” The lesson is that old rules of thumb about investing may be less relevant today.

To be clear, I don’t question the suggestion of Zweig or the researchers that political parties in power tend not to explain much about returns to investors. But I think it would be a vast mistake to infer that politics doesn’t matter.

The premise that politics may very well matter to investors is the focus of our forthcoming conference:

In my just-previous post, I described the impressive line-up of speakers and topics; more details are available at the conference web site. The main purpose of this conference is to jump-start investors’ reassessment of the post-election outlook.

Whatever the outcome of the U.S. elections on November 6^th, interpreting their implications for investors will be an urgent task for months to come. To do so effectively, my counsel is that investors should:

· Remember the variety of policy levers in the hands of government.

· Remember that policy changes will have differential impacts on different industries, and even on different firms within those industries.

· Remember that the old rules may change in light of the remarkable new conditions in which the economy finds itself. Here may be dragons.

“Maybe it’s time to ask a question that seems almost sacrilegious: Is all this investment in college education really worth it? The answer, I fear, is that it’s not.” — Megan McArdle, Newsweek September 17, 2012

“Right now, I would pay $100,000 for 10 percent of the future earnings of any of you…Many of you are a million dollar asset right now.” – Warren Buffett to a group of MBA students.

Well, there you have it: the gist of a debate over the value of higher education. Some say high; some say low. The media have been loaded in recent months with angst about student loan debt. By any absolute standard, this is a big exposure. The default rate on student loans has spiked to 13.4% for graduates of the class of 2009. Mounting student debt triggers a great deal of finger-pointing: it is claimed that universities charge too much; employers aren’t making jobs available for graduates; the government isn’t doing anything to help; the students didn’t know what they were getting into; and bankers are heartless in throwing hapless borrowers into bankruptcy.

Finance 101 teaches that the simple availability of credit should be irrelevant to anyone’s decision about borrowing. Instead, the dominant consideration should be the attractiveness of the purpose to which the borrowed funds will be put, compared to some benchmark. “Attractiveness” can be defined in a host of ways—the economic test of attractiveness would be whether the return on an investment in higher education exceeds the cost of funds to finance it. It could be that all those student borrowers acted sensibly to invest in their own human capital. Thus, the dominant question should be, does higher education pay? Does it yield a sufficient rate of return to service debt and leave something over to lift the student’s standard of living?

The return typically exceeds the cost of financing

Plenty of evidence suggests that the payoff from investing in higher education is large. The longer answer is “yes, if…” the student borrower is a careful and critical consumer of loans and educational services. To understand the general conclusion and some nuances, let’s look at research findings.

Academic studies find that the returns from investing in one’s education are very high, well exceeding the returns that consumers might conventionally enjoy on a range of investments. Generally, research finds real rates of return on investment upwards of 10% and as high as 50%. ^[1] Most recently, the Brookings Institution released a report in which they actually calculated the ROI on a college education—they did it in the right way, including the cash outlays and foregone earnings while in college as the “investment.” They summarized findings as follows:

Higher education is a much better investment than almost any other alternative, even for the “Class of the Great Recession” (young adults ages 23-24). In today’s tough labor market, a college degree dramatically boosts the odds of finding a job and making more money. On average, the benefits of a four-year college degree are equivalent to an investment that returns 15.2 percent per year. This is more than double the average return to stock market investments since 1950, and more than five times the returns to corporate bonds, gold, long-term government bonds, or home ownership. From any investment perspective, college is a great deal.

The Brookings report continued,

Another way to view the total dollar benefit of a four-year college degree is to compare the cumulative lifetime earnings of workers based on their educational attainment—as shown in the graph below. Through this lens, a bachelor’s degree clearly provides the largest boost to earnings. Over a lifetime, the average college graduate earns roughly $570,000 more than the average person with a high school diploma only—a tremendous return to the average upfront investment of $102,000 investment. An associate’s degree is worth approximately $170,000 more than a high school diploma.

And other benefits amplify the return on investment in higher education

And the ROI could be higher yet. Maybe the ROI estimates ignore unquantifiable effects from an investment in higher education. The estimates of return understate the benefits if, as seems likely, any of the following benefits obtain:

· Greater career flexibility. As we see at the Darden School, our degree programs help career switchers—both at the point of graduation and later in life because our students have been trained in a variety of functional fields of business. And a degree helps you in any horse-race with other applicants for a job: higher education signals the ability to learn new skills presently and in the future. Michael Spence won his Nobel Prize in Economics (2001) based on his research finding that higher levels of education signal rarer capabilities to prospective employers. Education creates career options, flexibility that can help you find more fulfilling and remunerative work. Business education in particular can help you anticipate risks and errors in starting new businesses, developing new products, and helping firms grow. Given the conventionally high rates of business failure, it would seem that professional training certainly beats the alternative, the “school of hard knocks.”

· Higher quality-of-life. Research shows a positive association between higher levels of education and health, civic engagement, family stability, and a negative association with ills such as crime and addiction.

· Higher prospects for social mobility. The growing “income gap” between the more and less affluent is associated with level of education. Robert Reich wrote in The Work of Nations: “The widening gap between rich and poor seems to be related to a growing divergence in how much money people receive for the work they do. And that divergence, in turn, appears to have something to do with their level of education. If you graduated from college, your earnings improved. If you did not, and especially if you were male, you got poorer. Further, the trend is not limited to the United States; it is occurring in many other places around the globe.” (p. 207)

· Growth in wisdom. Aristotle said, “knowing yourself is the beginning of all wisdom.” Perhaps the association between education and higher quality of life is due to self-knowledge acquired in higher education: an accelerated maturity in judgment, refinement of values, a deepened sense of personal honor, growth in the capacity to think critically, and increased clarity about purpose. Higher education simply prepares one to function more effectively in the face of life’s uncertainties. William Lewis, in his important book The Power of Productivity, wrote, “Education is the organized system for helping the members of a society to understand themselves and the world in which they live. It’s not the only way. Simply living accomplishes much of this. However, education, at least theoretically, is much more efficient. Through education, we learn the lessons of the past. Through living we learn only the lessons that current experience can teach us.” (p. 307)

· Reduction in risk of unemployment. This may be the most obvious un-quantified benefit from an investment in higher education. The Brookings report acknowledges that its own ROI estimates are not adjusted for the risk of unemployment. Education provides a valuable hidden option that helps to act as a shock absorber, like an insurance policy, against the episodic employment shocks that business cycles impose. The higher-educated are out of work less often. Today, the unemployment rate for college graduates is 4.1%, about half the rate for the whole U.S. population. This finding is robust across time—see the following graph.

A report by Georgetown University’s Center on Education and the Workforce finds that the recession starting in 2008 hit the less-educated disproportionately harder:

Data from the Current Population Survey prepared by the Bureau of Labor Statistics shows that graduate degrees typically yield a higher return and even lower unemployment:

Specifically regarding MBA degrees, a recent Forbes posting commented,

According to The Economist, employers typically pay MBA graduates twice as much as those with bachelor’s degrees, and about 35 percent more than those who earn Master of Finance degrees. The wage loss that has been experienced by millions of American workers has not been too pronounced for MBA graduates. Considering the economic damage sustained by the U.S. workforce, MBA degrees can be thought of as truly being “recession-proof.”

I have not seen a value placed on this insurance effect. But given that the insurance is long-lived and apparently so reliable, its value is probably high.

Now for some critical thinking

The findings presented so far are pretty consistent: the ROI on higher education is high. Why might this dream not come true for someone in particular? Consider several factors that can affect the ROI:

· The average ROI may not be a good predictor of likely outcomes. The discussion so far has focused on large-sample findings and generalizations from experience. Maybe the ROI estimates are averages drawn from a wide and skewed distribution: perhaps a few graduates of elite schools get really high salaries and these graduates pull the averages up, while most other graduates don’t fare so well and never realize the average ROI. The average starting salary of MBA graduates is roughly associated with the ranking position of the school. The AACSB says that there are some 13,000 institutions in the world that award higher degrees in business—do all of these produce golden apples?

· Maybe times have changed. As the advertisements say, past performance is no guarantee of future outcomes. Megan McArdle and Tyler Durden suggest that we are in the late stage of an educational bubble—not unlike the housing bubble—that will lead to a crash in the value of higher education. But the research on the ROI to education covers longer time-frames that include booms and busts. Even if there is a bust in the near future, one faces a lifetime over which to harvest the benefits of education. With the benefits of modern medical technology, the student today could be looking at 60 years of productive application of one’s education. To say that education won’t pay sometime in the future is quite a stretch. As Sir John Templeton said, “The four most dangerous words in investing are ‘This time it’s different.’”

· Personal choices. For instance, the choice of undergraduate major is associated with an enormous range of starting salaries right out of college. PayScale offers some data on this: from low to high is more than a 3X variation. Average starting pay for theology majors is $32,500; for petroleum engineers, it is $98,000. Other choices affect future earning power: where to live; which industry to work in; and which field you chose for training. Higher education opens doors; it doesn’t make you choose which door or dictate the speed with which you walk through.

· Other stuff drives success too. In addition to level of education, think of all the other influences on one’s career success: work ethic, integrity, “people skills,” mentoring, and social upbringing. Luck plays a huge role: for instance, the business cycle annually creates thousands of stories of “being in the right (wrong) place at the right (wrong) time.” One’s initial job right out of college has a strong association with future earnings. The PayScale data show that starting salary explains 78% of the variation in salary at mid-career in the same industry.

Given this list of factors, it seems inevitable that the ROI from an investment in education is bound to differ from the average result. Higher education is associated with certain good outcomes; but no law says they will occur.

Conclusions

Higher education pays, conditional on the critical thoughts mentioned earlier. The higher you go up the educational ladder, the more it pays. Even getting just some higher education pays: an associate’s degree or even a year of college can lead to higher earnings and less exposure to the risk of unemployment. If Warren Buffett—the so-called “world’s greatest investor”—sees a fair trade of education expense for a claim on future income, the return on higher education must be real. Lumni, co-founded by Darden graduate, Miguel Palacios, extends educational financing in return for a participation in future earnings.

But I offer four cautions to the prospective student:

· Higher education may not be for everybody. You have to be ready to make a sacrifice for your degree: it takes time, money, and great effort. And it takes the academic preparation and intelligence to do the work—Charles Murray has made much of this in arguing that too many people are going to college. If you have doubts about your readiness for higher education, a candid chat with an educational counselor should clear the air. My recommendation: if you have the preparation and the gumption to study, get as much higher education as you can.

· Consider the alternatives. There’s vocational training to learn a craft. The military can teach you a great deal about self-discipline and devotion to the team; but if you want to become an officer, you’ll need a college degree. Or you could start a business—venture capitalist, Peter Thiel, has been paying high school graduates not to go to college, but to become entrepreneurs instead. But with 19.7 million students enrolled in colleges and universities in the U.S., keeping up with your peers will have a strong appeal.

· Be a wary consumer. Think critically about what you are investing in and the benefit you can hope to receive. These days, students give great attention to their vocational preparation. Learning to reason and communicate well and building your social and moral awareness are hugely important to success in just about any field. So don’t ignore the liberal arts. Instead, focus on the quality of the learning experience you will have. Is the school accredited? Is the school selective? You will learn a great deal from the students around you, so consider what they have to teach you.

· Have faith. Focus on getting an education, not just a job. It is absolutely wrong to think of one’s education as a short-term financial transaction. What you put in is clear; what you get out is less clear but likely to prove a powerful advantage over time. Paradoxically, those students most focused on the immediate gives and gets are most likely to make poor decisions about what and where to study.

The high rate of student loan defaults in the U.S. is a tragedy, a sad corrective to poor decisions by students and aggressive recruiting by diploma mills. Research is shedding light on predatory sales practices at diploma mills that prey on the unsophisticated aspirants in higher education. Those practices are wrong. Sunlight is the best disinfectant. No doubt, lawsuits and government investigations will prompt more regulation. Meanwhile the best protection is very diligent research, assessment of alternatives, and critical thinking about what you give and get.

But the current angst over the currently high student loan default rate should not obscure the well-documented fact that, on average and over time, achieving an education can yield massive benefits to the individual. For most people, borrowing to get a degree will be worth it.

1. See four studies: Card, D., 2001. “Estimating the Returns to Schooling: Progress and Some Persistent Problems”, Econometrica, 69(5), 1127-1160. Palacios-Huerta, I., 2003. “An Empirical Analysis of the Risk Properties of Human Capital Returns”, American Economic Review, 93(3), 948-964. Psacharopoulos, G. and H. Patrinos, 2002. “Returns to Investments in Education: A Further Update,” World Bank discussion papers 2881. Heckman, J, Lockner, and P. Todd, 2003 “Fifty Years of Mincer Earnings Regressions” http://papers.ssrn.com/sol3/papers.cfm?abstract_id=410658. [↩]

… the truth of the statement I heard long ago in the Army: Plans are worthless, but planning is everything. There is a very great distinction because when you are planning for an emergency you must start with this one thing: the very definition of “emergency” is that it is unexpected, therefore it is not going to happen the way you are planning.” — Dwight D. Eisenhower

This is an apparent contradiction that is relevant to all students: if the future is unknowable, why should we plan or train? Navy SEALS are renowned for relentless training. Yesterday, I asked a SEAL who just enrolled at Darden, “given that there is so much uncertainty in special operations, why do you go through drills, scenarios, and exercises of all kinds? Critics suppose that such training just teaches you how to handle those specific situations. Are they right?” One critic I had in mind is Peter Thiel, a big private equity guy, who is telling 19-year olds that more training isn’t worth it. I’ve already blogged about the objection that “Steve Jobs didn’t go to b-school!” But a SEAL who was signing up for more training (21 months at one of the more demanding MBA programs) piqued my interest: SEAL vs. Thiel.

So the SEAL responded, “Actually, the training we do helps us anticipate and deal with uncertainty, surprises, and clever adversaries; it helps us deal with all situations.” Like Dwight Eisenhower’s view (“planning is everything”), it isn’t the specific plan or scenario that matters in training SEALS, but rather it is the discipline and capacity for response that training and planning create.

We see countless examples of this in professional life: business negotiators and trial lawyers who rehearse through scenarios before going in to meet their counterparties; consultants and sales professionals who rehearse presentations and practice responding to objections; general managers rehearse giving difficult feedback before meeting with an employee.

The 2012 Olympics offered relentless reminders that training pays. Malcolm Gladwell, in his book Outliers: The Story of Success devotes a chapter to the “10,000-Hour Rule.” He quotes a neurologist Daniel Levitin, “The emerging picture from such studies is that ten thousand hours of practice is required to achieve the level of mastery associated with being a world-class expert—in anything.”

Rehearsals, stories, and simulations are good for us. In his review of the interesting book, The Storytelling Animal: How Stories Make Us Human, David Eagleman wrote, “Neuroscience has long recognized that emulation of the future is one of the main businesses intelligent brains invest in. By learning the rules of the world and simulating outcomes in the service of decision making, brains can play out events without the risk and expense of attempting them physically. As the philosopher Karl Popper wrote, simulation of the future allows “our hypotheses to die in our stead.” Clever animals don’t want to engage in the expensive and potentially fatal game of physically testing every action to discover its consequences. That’s what story is good for. The production and scrutiny of counterfactuals (colloquially known as “what ifs”) is an optimal way to test and refine one’s behavior.”

Darden’s developmental approach relies on rehearsals, stories, and simulations probably more than any other business school. Occasionally I’m challenged to justify what we do. After all, wouldn’t a lecture-based curriculum be more efficient in time and effort? Perhaps. But as the SEALS, Olympians, and many business professionals demonstrate, mere lecturing is not as effective as a developmental approach based on rehearsals, stories, and simulations.

In the course of our MBA program, our students will wrestle with several hundred business situations. Each case will seem to be unique, but when combined with hundreds of others, will form a truly impressive mosaic of risk, opportunity, and most importantly, of wise action. Rarely will there be a “right” or correct answer to a case study—but there are many wrong ones. Repeated practice helps one to anticipate error. Wrestling with the case studies helps you grow in wisdom.

But there is more. Simply putting in the time (be it 10,000 hours to get to the Olympics or 2 years to get an MBA) is no guarantee of mastery. More work is not the answer; the right kind of learning is what’s important. Simply reading cases and offering one casual comment per class won’t get you where you need to go. Each case offers a rehearsal or practice session. If you practice deliberately you will accelerate your development.

The concept of deliberate practice is discussed in two good books: Geoff Colvin’s Talent is Overrated: What Really Separates World-Class Performers from Everybody Else and David Shenk’s The Genius in All of Us: Why everything You’ve Been Told about Genetics, Talent, and IQ is Wrong. As Colvin writes, “Deliberate practice…is activity designed specifically to improve performance, often with a teacher’s help; it can be repeated a lot; feedback on results is continuously available; it’s highly demanding mentally, whether the activity is purely intellectual, such as chess or business related activities or heavily physical, such as sports; and it isn’t much fun.” (p. 66)

A program such as Darden’s has all of these attributes; and it can be fun, though the rigor feels pretty demanding. Colvin says, “If it seems a bit depressing that the most important thing you can do to improve performance is no fun, take consolation in this fact: it must be so. If the activities that lead to greatness were easy and fun, then everyone would do them and they would not distinguish the best from the rest. The reality that deliberate practice is hard can even be seen as good news. It means that most people won’t do it. So your willingness to do it will distinguish you all the more.” (p. 72)

Here’s my take on Thiel vs. SEAL. Thiel’s skepticism is worth pondering. Not all MBA (or other degree) programs are created equal. You need to be a careful consumer and weigh the pros and cons of each. Getting a degree is no guarantee of reaching your life’s goals. If you simply can’t wait to start a business, then any kind of formal training will be a tremendous bore. As I have said in this blog in numerous ways, you must listen to your head and your heart—when called seriously, follow.

But if forced to bet on Thiel or the SEAL, I would put all my chips on the SEAL. Training pays. Indeed, research ^[1] suggests that the return on education is very high, perhaps the highest available to most consumers. The correlation between years in school and earning power is strong and positive. But I would add that some kinds of training are bound to have higher returns than others. Your return will be higher if you, the student, bring great commitment and energy to the enterprise. And like Darden’s learning experiences, the training you choose should harness insights of extensive research on high performers:

• Stories, rehearsals, and simulations are not mere entertainment or illustrations of lofty concepts, they are likely to be the main arena of your development.
• Your development consists of growth in knowledge, skills, and attributes of character. Too often, students focus on the knowledge stuff (facts, formulas, names, dates), which are easily transmitted in lectures, textbooks, and MOOCs. It is much harder to acquire the skills and attributes of character—gaining these is where the rehearsals, stories, and simulations have great impact. Also, skills and attributes will distinguish you more than knowledge.
• Practice deliberately, not passively. Set goals: where do you want to develop? In setting goals, focus on the process of reaching an outcome, not just the outcome itself. Put in plenty of dedicated time. Consider possible alternative scenarios, not just the focal scenario of the case story, rehearsal, or simulation. While you are studying a case or are in a discussion, think not only about the immediate problem, but also try to step outside of the immediate issues and monitor the larger processes or concepts prevailing in the situation—this is called, “metacognition,” and will help you derive principles from specific situations. Ask for feedback regularly and often, from professors, friends, classmates, anyone who seems willing to speak candidly. And when you ask for feedback be as specific as you can: not, “how am I doing?” but “Did I respond effectively to your question?” or “Was my presentation clear and concise?” When you get feedback, reflect on it and change as you believe change is warranted. Remember that one way to gain helpful feedback is to be a helpful coach to others; so often, what you receive from others is related to what you give. If you get downright lost (it happens to us all sooner or later), ask for help forthrightly. Ultimately, you must believe in your own ability to perform at a high level; deliberate practice requires high motivation; you must be your own best friend.

It’s not the arrival, but the journey that matters said the philosopher, Montaigne. In graduate school more than anywhere else, how you learn is what you learn. Focus efforts on the process and you will grow.

1. See four studies: Card, D., 2001. “Estimating the Returns to Schooling: Progress and Some Persistent Problems”, Econometrica, 69(5), 1127-1160. Palacios-Huerta, I., 2003. “An Empirical Analysis of the Risk Properties of Human Capital Returns”, American Economic Review, 93(3), 948-964. Psacharopoulos, G. and H. Patrinos, 2002. “Returns to Investments in Education: A Further Update”, World Bank discussion papers 2881. Heckman, J, Lockner, and P. Todd, 2003 “Fifty Years of Mincer Earnings Regressions”. [↩]

“Coursera” is the third person singular, future tense, of the French verb, “to run, race, or chase.”[1] Coursera is also a leading aggregator of online courses of study. Yesterday, University of Virginia and Coursera announced a partnership to place UVA courses online. Darden has agreed to provide one of these courses, starting in January. A race of sorts is in progress, which brings the French verb to mind. The announcement and the volume of subsequent email invite more discussion. What are our aims? What do we have to bring to this? What are Coursera and the partnership all about? Will this be sustainable? Let me explain our[2] view.

What are our aims? We are motivated by one thing only: to advance Darden’s mission, “to improve society by developing principled leaders for the world of practical affairs.” As I said in an earlier blog post, online ed should be animated by a concern for student learning. Period. This partnership is a relatively little bet that can help Darden understand whether and how purely online instruction can serve the interests of our students.

What does Darden bring to this? It is understandable that some people think Darden is simply about face-to-face classroom instruction. In fact, Darden has been exploiting digital technology for years on behalf of what we do best: high-engagement learning. We are a leading producer/distributor of digital case studies and simulations. Our print cases have been digitized for download to iPads and Kindles. And two of our degree programs, EMBA and GEMBA, are “hybrids” that draw on the best advantages of in-person and online instruction. The partnership with Coursera is the logical next step in our experimentation with digital technology.

What is Coursera? Coursera is a social entrepreneurship company that partners with the top universities in the world to offer courses online for anyone, free of charge. Partner Universities develop the courses and own all associated IP rights to the courses. Coursera is the delivery platform for the courses. Coursera was launched in April of 2012 by Stanford Professors Daphne Koller and Andrew Ng. Coursera’s first partner schools were Stanford University, Princeton University, the University of Michigan and the University of Pennsylvania.

Along with some courses from UVA and the first partners, Coursera will now also host courses from California Institute of Technology, University of California-Berkeley, Duke University, Johns Hopkins University, Rice University, Georgia Institute of Technology, University of Illinois, University of Toronto, University of Washington and other partner universities.

Is this a big bet by UVA or Darden? UVA, Darden and the College of Arts and Sciences will fund the development of the courses that we will offer via Coursera and decide what courses will be offered. Because we control the quantity and pace of course offerings we also control the level of financial commitment we are making via this partnership. Our engagement with Coursera is best conceived as strategic addition to the portfolio of technologies and methods that UVA, the College and Darden use to reach and teach students. UVA’s partnership with Coursera is a non-exclusive agreement with simple terms of exit.

What is a “MOOC”? Courses offered through Coursera and similar providers are frequently referred to as MOOCs (Massive Open Online Courses). Some MOOCs have enrolled more than 50,000 students for a single course offering. Research on the efficacy of MOOCs and other asynchronously-delivered online courses support their use in various course settings. Some of the key characteristics of the courses offered via Coursera are frequent assessments of learning and the support of online social communities that form alongside course delivery.

What courses will be offered by Darden and other units of UVA? As part of the partnership announcement UVA has agreed to schedule five courses for delivery. Professor Ed Hess of Darden has agreed to deliver a two-part course, Grow to Greatness I and II. These courses will be delivered beginning in late January of 2013. Faculty members in the College of Arts and Sciences have committed to delivering three courses: How Things Work I by Professor of Physics Louis Bloomfield, The Modern World: Global History Since 1760, by Professor of History Philip Zelikow, and Know Thyself by Professor of Philosophy Mitch Green. The courses offered by the College will be scheduled for delivery in late fall of 2012 or spring 2013. This fall, the Darden faculty will commence the process of determining which other courses to develop and schedule for future delivery via Coursera.

Will students earn degree credits at UVA for completing these courses? No. Students enrolled in courses offered via Coursera and who successfully complete these courses receive a certificate of completion, but no course credit at UVA. For their enrolled students, some universities may elect to use their own or other university’s Coursera courses as primers for credit-bearing courses, as supplements to credit-bearing classes or to implement a ‘flipped classroom’ model of course delivery.

Is this sustainable? I don’t know. An important aim is to get some experience and then decide. In my previous blog post, I argued, “online is more likely to spawn losses for the traditional not-for-profit colleges and universities—this stems from the cost of creating digital content and reinventing programs.” The operative phrase is “more likely.” I’ve been mugged by reality enough times on projects involving educational technology that I want to take a hard look at the resource requirements. Here are some of my concerns:

· “Production values” will make online ed expensive to produce. The production of an online course is rapidly moving beyond the use of a stationary video recorder capturing a professor in a lecture hall. It is already clear that there is an arm’s race on the basis of quality. Look for three camera shoots and creative directors coming to campuses soon. You’ll need scripts, a production crew, interactive capabilities, and a sound studio. To go online, you must make investments of several kinds: software and equipment, training for the faculty, and digital content—any one of these can be substantial. My colleague, Peter Rodriguez, produced Why Economies Rise or Fall with The Great Courses and says that the infrastructure used there probably exceeds the resources of most schools. And another colleague, Michael Lenox, produced Foundations of Business Strategy that is hosted on another aggregator, Udemy.com. Any digital delivery will need to be supplemented with systems for tutoring and peer-to-peer mentoring. All of this is not cheap. I have heard of a university that spent $15 million to produce one online course.

· The development of digital courses and materials is not a “once and done” investment. Courses and materials need to be updated. When that corporation you used in a case study goes bankrupt, the old case goes obsolete and must be revised. The theories in a field will change; new empirical findings must be discussed. With digital material, steady changes become expensive. This is why chunking the courses is helpful, especially on the most fundamental courses. But if one competitor incorporates new segments on the financial crisis in Europe, the race is on for all of us to match and get ahead.

· Venture capitalists and other “smart money” are pouring into the online aggregators because higher ed looks like a replay of what happened in the music and filmed entertainment industries: disintermediate the incumbent distributors and gain rights to distribute the content that someone else paid to develop. Coursera is not spending to develop content; Coursera’s partner schools do that. This looks like a “no-brainer” for Coursera. On the other hand, you don’t see venture capitalists or other “smart money” pouring into colleges and universities mainly because they see only big outlays ahead to develop content. The “smart money” is voting with its feet: the flow of funds toward the online aggregators, to the neglect of universities is consistent with my argument that online ed will be costly to colleges and universities.

· The online aggregators are exchanges where the content providers will compete for interested students. Look for a surge of entrants into the exchanges, a shake-out, and the emergence of some popularly-dominant content providers who will likely be the best-known and best-funded universities. This is an important point with many implications for universities. Everyone sees an equilibrium outcome years away when the dust has settled a bit and exits have taken place. Then the scale will pay for development. But the path to that equilibrium will be littered with lots of competing courses, and lots of redundant but costly-to-produce courses. If we want to advance our academic mission, we have little choice but to take at least some risks. And, yet we know they can’t all pay off.

· Learning-by-doing is costly. Most professors are novices at online education and uninitiated in the artistry of high-value production. Like any early-stage industry, we are seeing a great deal of trial-and-error production, most of which will be written off not long after produced. Who bears the cost of this? The universities, not the aggregators. These developments promise tremendous value to the world and to students everywhere. The outcome could be a very positive paradigm shift for access to quality education and lifelong learning. But, for that value to be realized, many losses will be incurred and no one is going to go down without a fight.

If, as you say, the negative outlook is “more likely,” then why bother? Some might suggest that we should sit back and let other schools do the work of developing online courses, and then just ride on their efforts. Many schools will eventually make that choice about online courses. But our commitment to leadership in instructional excellence wouldn’t allow us to take that route. Our mission, vision, and strategy require staying at the leading edge and shaping developments such as this one.

We are glad to join the chase, the race, the run. And we will do so pragmatically and with first priority on the quality of student learning.

[1] OK, it’s a pedantic title to this post: the conjugation of the French verb.

[2] This post also benefits from contributions by my colleague, Peter Rodriguez.

All I could do was laugh. In the turmoil of the past three weeks at UVA, someone said that online higher education is motivated by greed. It is certain that entrepreneurs will try to make a profit in this space. But I laughed because online is more likely to spawn losses for the traditional not-for-profit colleges and universities—this stems from the cost of creating digital content and reinventing programs. I see a new arms race in the making: there is no nirvana in the new technology.

Why, then, should universities mess around with digital instruction? The only motive should be the better fulfillment of our educational mission. It might afford improvements in the quality of the learning experience. And it should enable broader access. This is the gist of an argument eloquently presented in The Innovative University: Changing the DNA of Higher Education from the Inside Out, by Clayton Christensen and Henry Eyring—whether or not you like the concept of disruptive innovation in higher ed, I recommend that you read this book.

Some schools and some students will have an appetite for none of this. And it is not clear what will be the consequences of doing nothing. But it’s possible that what iTunes did for music and Netflix did for films will be what online education will do to traditional colleges and universities—not a pretty prospect.

If standing still is not an option, colleges and universities will require new funding to generate digital content and gear up for online education. Donors, who give out of gratitude for the learning experiences they had years ago, may not understand the push to go online. This will require a compelling new vision about higher education and the convincing leadership to sell that vision. But as a philanthropic proposition, online education must surmount at least five objections:

1. This is a cash drain now; when will it ever become self-sustaining for higher education? No one can say; no one has a lock on the best learning platforms. Schools and companies are experimenting at a rapid rate. Some of these experiments are succeeding. Most won’t; all will grow obsolete before long, requiring ongoing investments through time. Professorial learning-by-doing will be expensive.

2. Is this a cost saving or just cost-shifting? A few weeks ago, some colleagues and I called on Professor Daphne Koller, a professor in computer science at Stanford. She is one of the founders of Coursera, a not-for-profit organization that is putting courses online. Professor Koller is an articulate advocate of “inverting the classroom:” students watch digital lectures at home and then come to class for high-engagement learning with instructors. This might be a more effective learning experience for students. But it is hard to see how this model affords improvements in faculty productivity, one of the vaunted pitches for online education.

3. In the high-quality segment of higher education, economies of scale are likely to be elusive. The economic dream of online education is large-scale operation. If one instructor can reach hundreds or thousands of students, it ought to be possible to make serious money—this improvement in productivity is the dream of the for-profit providers. But the “high touch” kind of instruction at which liberal arts colleges and universities excel is the enemy of large scale.

4. As with music and films, isn’t the real determinant of success the talent? One can envision the rise of a “star system” of well-known instructors. Celebrity is sometimes mistaken for quality; and schools with well-known instructors are likely to exploit that. At first glance, which instructor is likely to attract more enrollments: an unknown teacher or a Nobel Laureate? It seems possible that online education will amplify the arms race for talent that already exists among colleges and universities. The race for celebrities will not be cheap.

5. Isn’t this really about other people exploiting the inflexibility of colleges and universities? Even if a not-for-profit college or university were able to satisfy the other questions in some way, path dependency remains a daunting obstacle. Universities get committed to a path or strategy by virtue of decisions they have made in the past—such as where to locate, what kinds of programs to offer, and whom to hire. Tenure grants lifetime employment to some instructors—to abrogate those commitments is morally wrong and legally challenging. But the supposed economic appeal of online instruction is rising faculty productivity. What happens if a school takes the plunge and makes a substantial investment to go online, and then doesn’t need all the faculty members it has hired? It could take expensive buyouts or years to wait for downsizing through retirements.

To digitize the curricula of a major research university would be very expensive. Given the parlous state of finances in higher education today, declining state support, and the deflationary pressures on tuition, one foresees a major capital call on donors coming just over the horizon. Will the generous public respond? Capital mobility is the great advantage of the for-profit schools, especially those that are publicly-listed or owned by public corporations. In the absence of a Great Transformation through private philanthropy, it is not implausible that the for-profits will not merely disrupt but will displace the not-for-profit educators.

Will donors respond? I hope so.