Yesterday, the U.S. Postal Service announced the issuance of the “Forever Stamp.” This stamp may be purchased for 41 cents today and used any time in the future—it carries no dollar value on its face. Regular U.S. first-class postage today costs 39 cents, suggesting a two cent premium for a hedge against inflation in postal rates. The volume of sales of these stamps will be a rough indicator of consumer sentiment about inflation.

An interesting thought experiment is to query whether and how business students might hedge against depreciation in the MBA degree, creating the “Forever MBA.” The risks the student faces are of at least two sorts: (a) school-specific and (b) systemic. School-specific risks emanate from fire, weather, earthquakes, and the actions of Deans, professors, students, and others in ways that impair the brand of a specific school. Students can insure against many natural disasters (with Hurricane Katrina, students in New Orleans discovered the virtue of such protection–to my knowledge, no schools refunded the lost tuition). But virtually no insurance company affords protection against stupidity. Therefore, I doubt that we will ever see protection against all school-specific risks. Systemic risks arise from large forces in the economy that might devalue the MBA—a sharp recession or economic shock (the price of oil suddenly spikes to $100/bbl) would be the paramount examples. To hedge against systemic risks, as you enroll in an MBA program, you could invest in contra-cyclical stocks, index put options, or perhaps a market basket of commodities. But I think that all such hedges would be badly mistaken.

In a person with an “MBA,” society sees not a diploma, but a person of mastery, sophistication, and self-confidence. The really appropriate response to uncertainty about the future value of your MBA is to invest not in financial hedges, but in an ongoing program of education and personal development. How much should you invest? You might think about it this way: the return on education is about 10% in real terms (or today, about 12% in nominal terms). To create a “Forever MBA,” each year invest in your continuing learning an amount equal to the return on education (10% plus the inflation rate) times the current cost of one year’s education at a top business school less whatever your employer spends on educating you. For example, suppose that your employer sends you to seminars each year worth about $5,000. Is anyone investing enough in keeping your mastery current? The benchmark is the nominal return on education (say, 12%) times the one-year cost of an MBA program (about $60,000 at Darden, all expenses included) or about $7,200. Is anyone spending enough on your mastery, sophistication, and self-confidence? Not by this benchmark. You should shell out another $2,200 (the difference between the benchmark, $7,200 and the spending by your employer, $5,000) to try to stay up with the game. In some specialties, the spending could be much higher. $7,200 per year is not trivial, but neither is the assurance of your ongoing mastery, sophistication, and self-confidence.

We can quibble with this rough kind of calculation. For instance, very challenging work experience can result in profound learning. But it is very hard to price this kind of experience. In addition, it is sometimes unclear what is the effect of such experience—is it positive or negative? Walter Wriston, former CEO of Citicorp, once said, “Good judgment comes from experience. Experience comes from bad judgment.” Jeffrey Skilling, former CEO of Enron, is certainly more experienced these days, but is he more valuable? Does he now have good judgment? My advice is to honor wisdom whenever and wherever it may arrive but to eschew the fancy calculus of its value.

The larger point is that there is no substitute for life-long learning. Hedge against the uncertainty of postal rates by investing in Forever Stamps. Hedge against the uncertainty of professional mastery by investing in life-long learning.

Posted by Robert Bruner at 05/15/2007 10:13:16 PM