The MBA Myth and the Cult of the CEO

Records show that he won 1,462 out of the 4,257 four-horse races he competed in and was placed in an additional 1,438 races (mostly finishing in second place).

>Many of his victories took the form of a ‘come from behind’ crossing of the finish line at the last possible moment. The crowds loved it.

What a wonderful story. The fact that he frequently finished in second place makes me think he was often trying to pull off a come from behind victory without quite managing it.

"Why should there be a many-multiples reward for being slightly up the senior management ladder at each step?"

Really suggests some sort of a ponzi scheme...

I see a few critical problems with this research.

The first in the section "Do MBAs Make Better CEOs?". If the labour market is efficient we would NOT expect CEOs with MBAs to outperform CEOs without MBAs due to selection effects. We may expect them to outperform if we sample randomly from the general population that has MBAs versus that which does not, but this is not the sampling scheme in effect. If boards are able to accurately select non-MBA CEOs whose other characteristics compensate for the lack of an MBA, then we would expect a zero within-group correlation in the selected population. It is like if I was to hire a quantitative researcher for a machine learning research team. I could pick a PhD from a top school, or I could allow a non-PhD into my team as long as their other characteristics are sufficiently great (e.g. competition math in high school), but after appropriate selection effects there is no within-group correlation between holding a PhD and not holding one. If I looked at the average PhD versus the average non-PhD in the general population though, then an effect becomes apparent, but that's not the sampling scheme I've used.

The second problem is in the section "Is CEO Performance Persistent?". They used stock market returns which is flawed as expected CEO performance should be baked into the stock price from the beginning, meaning we expect zero excess return in the second sample even if the CEO was truly exceptional. This section would unlikely pass peer review into a top finance journal.

The only valid thing I can see is research about "Share Price Performance for CEOs Who Ran Multiple Companies", since nobody knows the second company ahead of time so the information shouldn't be baked into the price. But a lot of details are missing. Skewness and kurtosis of returns will impact the way they've quantized the data, among other things.

All in all, unpersuasive.

Neither the President nor the Pope have a considerable amount of power.

The office of the pres. was specifically designed to 'not be a king' and he's highly constrained by the other wings of government. The US was supposed to mostly about the states.

The Catholic Church generally gives a very wide berth as to the operational artifacts of Parishes. He's also to some extent a figurehead.

CEO means such different things at different scale, at different organizations, it's really hard to compare.

I suggest the issues may have a lot to do with short-term vs. long-term incentives.

Also - 'average' pay isn't so helpful when there are a few with massive, massive pay packages that skew all of the data.

As I stated, the market is largely efficient. I did not say it is completely efficient.

Also throwing out Rentech as an example just further proves my point.

The inefficiencies that Medallion fund is exploiting are extremely capital constrained (ie. They are very tiny). This is why they don’t accept outside investor money and even limit the amounts employees can have in the fund. The fund is limited to roughly $3 billion, because the inefficiency they are exploiting is that small.

An inefficiency of $3 billion in capital markets of roughly $100 trillion dollars is tiny.

All of Rentech’s larger funds for outside investors have not shown the same ability to beat the market.

Also, I’m amazed that you use Asness as a counterpoint, because if you’ve ever heard him speak, he would agree that the market is “largely efficient.” I’ve literally heard him say those words in person.

Asness’s entire hedge fund is based on Fama’s factor models. He literally makes his money by making the market even more efficient. He has admitted long-short factor funds like his have likely reduced (and will continue to reduce) factor alpha, hence why they need to apply leverage to make these returns significant.