Spending 2 years in a place called Billekahalli on Bannerghata Road means many things to many people. The masses tend to assume that you belong to the cream of the intellectual cream that this nation churns out every year. The future of the country it seems, is safe in our able young hands. Some even go to the extent of proclaiming this in front of one’s parents. This of course is most disconcerting to the martyrs who on numerous occasions been given enough reasons to suspect permanent brain damage in their sons and daughters. It was that fall from the tricycle you know… things were never the same after that. The stupefied look on those wizened faces hardened by years of futile battling to drive sense into the considerably thick skulls of their wards is priceless to say the least. The father knows something has gone fundamentally wrong with the universe when his colleagues ask his numskull son for his views on how the budget will impact the banking industry and carefully listen to the pearls of wisdom. It hurts even more if the said father has more than 30 years in the field. The mother is equally confused about her social standing among her friends suddenly shooting up from the day ET came out with its Rs.1.44 crore headline. To all the bemused parents out there, I assure you, your precious sons and daughters continue to be the same. The world may see them differently, but they continue to be as hopeless as they were before. Just that they spent two years in Billekahalli and are now worth much more.
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3 comments:
Weakly efficient post. You are worth more not because of two years in Billekahalli. Remember MicroEco 101 - it's simply a costly signal. You've chosen to spend two years of your life at IIM (not without considerable risk) hoping to crack a kickass job that will (hopefully) pay (in real terms) more than the job you gave up prior to joining IIM would pay two years in the future.
In reality, though, this is an incorrect way to look at the worth of the IIMB education since, as we have been told time and time again, the NPV rule along with utility maximization should be the guiding force of any rational investment decision.
The investment made in your IIM education amounts to Rs. 3 lakhs - Rs. 1.5 lakhs at time 0 and Rs. 1.5 lakhs at time 1. What is important is to look at the change in your lifelong cash flows as a result of this investment, discount at the appropriate rate and therefore obtain the NPV of your IIM decision. However, given that your future cash flows will be highly uncertain, it is necessary to assume a constant growth rate so that you can use the DGM model for valuation of your career. Now the big question is whether you should use a sub-GDP growth rate or a super-GDP growth rate. If you are an investment banker, in addition, what is your appropriate discount rate? If you choose to invest in risky securities like mortage pass-through securities that your friendly neighborhood investment bank invests in - your discount rate could be as high as 35%. More importantly this decision will be defined by your coefficient of risk aversion. It is possible that you will simply lock up all your cash flows in a big iron box - which, incidentally, is a negative NPV investment since it would have been better to put it in T-bills or long term government bonds - depending on the utility of money today vis a vis money later, for you.
The sheer complexity of this exercise is mind boggling. Let us write a paper.
Hope it was arbit enough.
Bleddy Hil, stop infringing upon Suri's trademark.
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