Top Schools Matter for Finance; Not for Engineering

[TheMoralEconomist1]

Top Schools Matter for Finance; Not for Engineering

That’s the conclusion of a recent report by The Wall Street Journal. As the authors describe, “Specifically, for business and other liberal-arts majors, the prestige of the school has a major impact on future earnings expectations. But for fields like science, technology, engineering and math, it largely doesn’t matter whether students go to a prestigious, expensive school or a low-priced one—expected earnings turn out the same.”

Keep in mind this data is for the United States, but you can bet the conclusions still hold here in London and the rest of Europe. The authors interviewed over 7000 graduates 10 years after they completed their degree. They then divided the graduate’s majors into broad categories and the schools they attended as selective (for elite schools such as Harvard, Princeton, etc.), midtier, and less selective (schools with open enrollment). The research focus is on undergraduates, and researchers controlled for things like race, gender, marital status, family income, SAT score, postgraduate degrees, and more.

Here’s how they divided the majors up.

Findings

For science, technology, engineering, and math (STEM) fields, they found no statistical difference in earnings between graduates from top schools, average schools, and schools with open enrollment. The opposite was true for business and liberal arts majors. As the WSJ reports, “The starkest earnings differences are for business majors, where graduates from the selective institutions earn 12% more on average than midtier graduates and 18% more than graduates from less-selective colleges.”

For business majors, the difference between attending a top school and an average school was over $15,000. Likewise, for social science and humanities majors, the difference was about $14,000. That difference is less than half for science and engineering majors. (Around $6000)

These numbers are in dollars.

Interpreting the Findings

Without knowing the specific breakdown of each major, it is difficult to draw exact conclusions. For example, finance is lumped together with marketing, which are significantly different industries. That being said, a number of inferences can be made.

Let’s start with the basics. What ways could college boost earnings? College could be a place where you learn technical and soft skills, such as computer programming or how to work with teams. College could also be a place where you network with individuals and graduates to increase your opportunities in life. College could also provide resources to aid you with things such as how to prepare a CV. Finally, a college degree could be a signal to employers about an individual. A more prestigious degree may mean that the individual is smarter or better connected than if the same individual had a degree from a less well known school.

Signaling

So, what does the data imply? It seems that the networking and resources aren’t that important. Networking may matter in the sense that target universities get better companies to visit and meet on campus, but networking in the sense of finding other individuals and alumni from your university doesn’t seem that powerful. If it were, then it would matter just as much for science and engineering as it does for liberal arts degrees. Also, even though top schools have more resources available to help their students, it doesn’t seem to matter for STEM fields.

So, what can explain these differences? An economics concept known as signalling is the likely culprit. You see, information is costly. To gain information about potential employees, firms must research, hire people specialized in finding new employees, go through interviews with dozens of candidates, and hire someone.

If a company picks the wrong employee, they will spend time training and paying salary on someone who doesn’t bring enough value to justify this expense. So companies use “signals” to see who is really valuable and who isn’t. If you attended a top university, that signals to employers that you are smart enough to get selected by a top school, you worked hard to get through, and you met other smart people along the way. Maybe someone who went to a less selective school is just as smart as you, but it’s not worth taking that risk for most employers.

This theory fits the data mentioned above. Some degrees have meaningful signals, whereas others do not. For example, if you are considering someone with an liberal arts degree, they likely did not get specific skills that you need; they mostly obtained general skills. So the degree itself can’t be used as a signal. Instead, the employer will look to the prestige of the university you attended. Top universities are heavily favored for these types of degrees, because the market does not have much demand for those specific majors. An anthropology degree from City University is all but useless, while the same degree from Oxford, well, at least you went to Oxford, right?

Contrast that with STEM majors, which are tremendously in demand. STEM majors are technical and standardized, so the employer can simply look at the degree and see the value, without needing to know as much about the prestige of the university. Obviously, prestige will still help, but not as much as with vague degrees. If I am looking to hire someone for a position as an engineer, then I can give them technical questions to see if they actually obtained valuable skills from their degree.

What about finance/ business degrees? This is more speculative, but I think business degrees are very generic and therefore do not tell much about the student. This is why the prestige matters more. In the highly competitive finance industry, someone with a business degree from an average university just does not stand out enough to be valued.

What it Means for You

If you are trying to break into finance, you need to have the best signals available. These signals include 1. prestige of university 2. type of degree 3. how well you do (GPA, etc.) 4. what skills you acquire and 5. extracurriculars. If you have already chosen/ attend your university, 1. is irrelevant, but you can still focus on the rest.

Do not just get a generic business degree; focus on technical fields. The world is getting more and more automated so learning computer programming skills will always be valuable. Don’t major in marketing or business, when actuarial science is available. Don’t study economics, when financial economics is available.

Take technical courses, not just from your university but online. If you aren’t taking advantage of the internet, you are handicapping yourself from day one. Anyone with an internet connection has access to the entire world’s knowledge; don’t spend free time on Facebook, when you could be taking a financial modelling course.

Finally, 5. will be your opportunity to stand out over others. Start a business, network with people (not bullshit Linkedin messages, but actually meeting bankers for coffee), learn programming languages, etc. What you spend your free time is who you become; and if you’re planning on working 100 hour weeks, don’t wait until graduation to get in the habit of working your ass off.

 

[thebondking1]

Great post.

 

[magellan1]

Insightful research and analysis, thanks for sharing.
I studied Finance and Business at 2 of the best universities in Europe and the world.
I agree that it is worth going to an elite school if you want to study Finance and not so much if you plan to study STEM.
Your chances of getting a high-quality job at a top-tier firm in the banking or investment industry are very low if you do not have a degree from a target university (top 50 in the world). There are multiple reasons for that.

1) Supply and demand
The reality is that there are many jobs available but only a small percentage of them are really interesting, challenging and well-paid. That is why the number of people wanting to have such jobs is far greater than the prestigious jobs. Investment management firms and investment banks receive hundreds of applicants for good roles. If you were in the shoes of the recruiters, would you prefer to hire someone from a top school or take a risk with someone from an unknown university?
2) Social class
This is somewhat of a taboo topic but having a front-office job at a top-tier firm means working with wealthy people and requires good etiquette, dressing style and social background. Attending a top business school is usually expensive and signals to potential employers your social class. Most likely you come from a middle or upper-class family unless you received a scholarship.
3) Value of your network
You need to have specific technical skills and experience to get the job done in STEM fields while in finance/business you need to have access to valuable information and know the right people to get the job done. Prestigious universities like LSE give you the opportunity to develop good relationships with important people who can help you in different ways.
4) Environment
The environment at top business schools like Bocconi is extremely competitive and motivates people to maximize their potential.
People who get accepted to top universities tend to be the best high school students and consider themself to be very smart. However, when those individuals start studying at a leading university, they realize that there are plenty of other smart people out there and they need to put a lot more effort to get ahead. Students at top schools are competing with each other all the time for internships, exchanges, exam scores, appearances, jobs and many other things.
5) Self-confidence
People who manage to graduate with a high grade (First Class Honours) from a university like Oxford have proof that they are among the smartest and most hard-working individuals. This has a positive effect on their self-confidence and behavior.

 

[JustAnotherHuman1]

Insightful research and analysis, thanks for sharing.
I studied Finance and Business at 2 of the best universities in Europe and the world.
I agree that it is worth going to an elite school if you want to study Finance and not so much if you plan to study STEM.
Your chances of getting a high-quality job at a top-tier firm in the banking or investment industry are very low if you do not have a degree from a target university (top 50 in the world). There are multiple reasons for that.

1) Supply and demand
The reality is that there are many jobs available but only a small percentage of them are really interesting, challenging and well-paid. That is why the number of people wanting to have such jobs is far greater than the prestigious jobs. Investment management firms and investment banks receive hundreds of applicants for good roles. If you were in the shoes of the recruiters, would you prefer to hire someone from a top school or take a risk with someone from an unknown university?
2) Social class
This is somewhat of a taboo topic but having a front-office job at a top-tier firm means working with wealthy people and requires good etiquette, dressing style and social background. Attending a top business school is usually expensive and signals to potential employers your social class. Most likely you come from a middle or upper-class family unless you received a scholarship.
3) Value of your network
You need to have specific technical skills and experience to get the job done in STEM fields while in finance/business you need to have access to valuable information and know the right people to get the job done. Prestigious universities like LSE give you the opportunity to develop good relationships with important people who can help you in different ways.
4) Environment
The environment at top business schools like Bocconi is extremely competitive and motivates people to maximize their potential.
People who get accepted to top universities tend to be the best high school students and consider themself to be very smart. However, when those individuals start studying at a leading university, they realize that there are plenty of other smart people out there and they need to put a lot more effort to get ahead. Students at top schools are competing with each other all the time for internships, exchanges, exam scores, appearances, jobs and many other things.
5) Self-confidence
People who manage to graduate with a high grade (First Class Honours) from a university like Oxford have proof that they are among the smartest and most hard-working individuals. This has a positive effect on their self-confidence and behavior.

Great comment and fully agreed. To expand on #2, these are in fact pragmatic reasons for employers and the result of simple cause-effect relationships while it would be easy to call it elitism. Calling it elitist is no more valid than calling capitalism unfair: it’s a fact, and it stems from the very nature of it. Wealthy parents will spend more on educating their offspring than less wealthier ones, therefore they will stand a better chance at landing a well paid job than their less educated counterparts. This is a core mechanism of capitalism, so if you don’t like it, remove it and then you get socialism. In which case there would be no high paying jobs at all, or much welfare either but I’m going off a tangent here.

They seek out the best of the best because they can and those candidates, let’s be honest, tend to be privately educated and white. The class system is prevalent in the U.K., even today but in other parts of the world (still developed) is not so much, and they arguably have a more meritocratic environment (the best example would be the USA).

There is really not much you can do about this (whether you have class or not), as you can’t fake an accent or class and that is completely outside of your control. And whether you like it or not interviewers will judge you on this and determine the answer for the above in about 5 seconds, but is not a dealbreaker. So I think the best way forward here is not worry about how you “look” but performing to the best of your abilities.

If money was no object, would you buy a Porsche or Toyota Prius? Most people would choose the former. The same logic applies to HR filtering through 1000s of resumes, given they hadn’t fill up the intern class simply with students they met at the career fair.

It’s important that one goes into the recruitment process with a realistic expectation to avoid disappointment but I guess this is easier said than done for someone who just got out of high school. As someone who went to a semi-targeted university in the U.K., landing such highly coveted roles can be done if one works hard and smart, a number of people graduating in my class have done so. I personally thought I had a great profile applying for spring weeks, and the reality was that I only managed to get a couple of interviews. A success rate (of getting an interview, not a place) of less than 5%. Networking, I think, is the main benefit from attending a “target” educational institution. Similarly, believe it or not there are people from the best universities who fail to get an graduate offer or get even an internship. So it’s really about more than just one thing.

This however is slowly undergoing important changes as well, with “woke” culture becoming stronger and stronger, even in recent years. Just look at how many programmes are available for the academically excellent (or decent at least) but historically disadvantaged/marginalised students from different ethnic, religious and or social backgrounds. Or look at the data and see what % of intern or analyst classes are recruited from such groups of society and they are actually a decent share and I anticipate the figures to be close to 50% in the coming decades unless woke culture loses momentum.

Obviously this is simply like internships and graduate jobs and not representative of the ones who actually succeed in the industry and do not quit after a couple of years. Racism is alive and well despite what employers and their diversity programmes might signal or tell you on the surface. Is a fact and of course no one wants to admit it, but cancel culture is here and being politically correct is a requirement.

Even this very website promotes social mobility to some extent by sharing info and advice re a relatively opaque professional career which is investment banking. Not to mention that this is an anonymous community and everyone is posting under a pseudoname, so one might get a more realistic insight or tips for the industry than by talking to someone staffed to sing all positives at a career fair for 5 minutes.

What’s your take on this?