Career & Success

Are Wall Street Careers Just the Luck of the Draw?

An economist finds that random factors play a large role in determining the kinds of jobs MBAs take upon graduation.

July 01, 2010

| by Stanford GSB Staff

Paul Oyer backs away from using the word “luck.” But nevertheless his research shows that many young MBAs who go into investment banking might just follow that career due to happenstance as much as because of a die-hard allegiance to Wall Street. And those who graduate during a bear market may never get the chance later to start a Wall Street career — a fact that dramatically cuts down on their lifetime earnings.

“It always struck me that being in the right place at the right time was important in career paths,” said Oyer, a professor of economics at Stanford GSB who studied the long-term career choices and salaries of more than 35 years’ worth of the School’s graduates. Oyer, who also researched career choices of PhD students, said he’s not surprised by recent research that finds the same career pattern for undergrads’ career tracks.

Oyer conducted surveys in 1996 and 1998 and concluded that random factors play a large role in determining the kinds of jobs that MBAs take upon graduation. Specifically, the proportion of graduating MBAs who manage to get hired into lucrative investment banking positions shrinks or expands depending on how well the stock market is performing in a given year.

For example, more than a quarter (26 percent) of Stanford MBAs who graduated two years before the stock market crash of 1987 became investment bankers. But just 17 percent of the MBA graduates two years after the crash took that career path. And the difference in payoff was huge. Based on the salaries provided by thousands of MBAs in this self-reported survey, Oyer calculated the present value of lifetime income of an MBA who went into investment banking to be $2 million to $6 million higher than an MBA who went into a non-banking career. “Thus the classes of 1988 and 1989 could expect significantly lower lifetime income due to the timing of their graduation than the classes of 1985 and 1986,” said Oyer.

Oyer also discovered that MBAs who go into investment banking — a category in which he includes money managers and venture capitalists — tend to stay there for the long term. For example, in the first few years after receiving their MBA degree, 5 to 10 percent of the people in investment banking leave, but attrition slows significantly after the fifth year and the percentage of a typical graduating class that works in investment banking does not change significantly after that point.

Thus although it might seem intuitive to believe that there are a limited number of MBAs who have a natural aptitude for investment banking, there’s no evidence to support that. Instead, the significantly greater numbers of MBAs who go into investment banking during bull markets are just as dedicated to banking in terms of how long they stay there and how much money they make. “This tells me that there is a deep pool of potential investment bankers in any Stanford MBA class,” said Oyer.

Another of the surprising things Oyer found during his research is that MBAs are not hopping in and out of investment banking in search of the perfect job. “The idea has long been that MBAs change jobs all the time. But what this study shows is that they are not jumping in and out of investment banking. It’s pretty sticky. Once you’re there you tend to stay; once you’ve started down another path, you’re not likely to move to a Wall Street firm.”

The research also suggests that bull markets might discourage entrepreneurs. “One question you would naturally ask, if in bull markets more people go into investment banking, what they are not doing?” asked Oyer. “And because there are a fairly limited set of things that MBAs do, there’s some evidence that when bull markets move people onto Wall Street, it takes away from consulting and entrepreneurial careers.”

On thing that the study does bear out is that graduating MBAs are correct in perceiving that general economic factors in the year they graduate will have profound long-term implications on their careers. “Every year our students get very anxious about the state of the job market. I always thought we — because I was the same way when I was finishing school — were being silly,” said Oyer. “But as it turns out, we had pretty good reasons to be worried about the state of the job market, as it would affect a lot of us for a long time to come.”

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