Why you can trust a woman with an MBA

My newlywed friend is applying for an MBA. She and I were discussing her application and general factors, like lost salary and tuition cost. But then the conversation shifted towards strategy. How would the MBA affect her employability in a game theory sense?

We came up with a few ideas, and I then looked into the matter a bit more. I came across a discussion in one of the books I was reading. The passage suggested the MBA should improve her job opportunities because prospective employers would be able to trust her more.

The logic is based on the idea of credible signals.

Credible signals

A credible signal is a sign that will genuinely reveal a person’s intentions–it is a sign that can be trusted. The operative word is credible, an idea I described before when discussing threats. Here is a bit more about credibility:

There are two kinds of threats: credible and non-credible. A threat is credible if it will likely be followed through. For instance, when utility companies threaten to disconnect your service for non-payment, it is credible since they do follow through.

A threat is non-credible if the opposite holds: you can’t believe it since it is unlikely it will be followed through. These threats are made to encourage behavior, but a savvy person would not believe them. For instance, a defense attorney may threaten that her client will drag a matter out in court-no matter what the evidence is-to encourage the prosecution to consider out of court settlements. But the threat is not credible because if strong evidence comes out, the defense will most likely bargain.

There are two main results: (1) you should only consider credible threats in your decision-making, and (2) threats are credible only if you would follow through on them.

Source: 5 ways to make your threat credible

Similarly, credible signals are ones that genuinely indicate commitment and can be trusted. What makes such a signal credible is often the financial repercussions of not following through.

And in the job market, the MBA offers such a credible signal.

Why the MBA helps

The explanation comes from the book The Art of Strategy, and here one passage about the MBA:

A prospective employer may be concerned about hiring and training a young woman only to find that she leaves the labor force to have children. Whether legal or not, such discrimination still arises. How does an MBA help solve the problem?

An MBA serves as a credible signal that the person intends to work for several years. If she was planning to drop out of the labor force in a year, it would not have made sense to have invested the two years in getting an MBA. She would have done much better to have worked for those two years and one more. Practically speaking, it likely takes at least five years to recover the cost of an MBA in terms of tuition and lost salary. Thus you can believe an MBA when she says that she plans to stick around.

Source: Avinash K. Dixit and Barry J. Nalebuff, The Art of Strategy, p. 250

Employer bias in real life

Would you hire a pregnant woman?

This is a nice post on Business Week. The article cites a European study that says only 5 percent of British managers would hire a pregnant woman. Also, over 50 percent of managers said they assess whether a potential hire might leave on account of pregnancy, using her age and marriage status as indicators. Such bias likely exists in America, though the extent is not stated.

I’m curious to know what you guys think, and in particular, if any of you have experienced gender or pregnancy bias. Or if your MBA helped you avoid this.

A small footnote

As a concluding note, The Art of Strategy is the updated 2008 version of Thinking Strategically. The new sections of the book, particularly about voting and auctions are great. This book is just a small notch down from “Thinking Strategically” (which is still high praise). Unless you are a game theory enthusiast like me, there is probably not enough new material to buy both this book and “Thinking Strategically.” But if you prefer a new treatment and knowledge of experiments, then this would be better than “Thinking Strategically.”