1. Intro

Here’s the good news: everyone has these unfounded fears, and they can be eliminated quickly. All you need to do is learn a few simple concepts that will change the way you think about how business works. Once you’ve con­quered your fears, you can accomplish anything.

If you’re an entrepreneur, designer, student, programmer, or professional who wants to master the fundamentals of sound business practice, this online course is for you. No matter who you are or what you’re trying to do, you’re about to discover a useful new way of looking at business that will help you spend less time fighting your fears and more time doing things that make a difference.

You Don’t Need to Know It Al

One of the beautiful things about learning any subject is the fact that you don’t need to know everything—you only need to understand a few critically important concepts that provide most of the value. Once you have a solid scaffold of core principles to work from, building upon your knowledge and making progress becomes much easier.

The Personal MBA is a set of foundational business concepts you can use to get things done. Reading this lectures will give you a firm foundation of business knowledge you can use to make things happen. Once you master the fundamentals, you can accomplish even the most challenging business goals with surprising ease.

If you invest the time and energy necessary to learn these concepts, you’ll easily be in the top 1 percent of the human population when it comes to knowing:

  • How businesses actually work.
  • How to start a new business.
  • How to improve an existing business.
  • How to use business-related skills to accomplish your personal goals.

Think of this course as a filter. Instead of trying to absorb all of the busi­ness information that’s out there—and there’s a lot out there—use this course to help you learn what matters most, so you can focus on what’s actu­ally important: making things happen.

No Experience Necessary

People always overestimate how complex business is. This isn’t rocket science—we’ve chosen one of the world’s most simple professions.

—JACK WELCH, FORMER CEO OF GENERAL ELECTRIC

Don’t worry if you’re a complete beginner. Unlike much other business course, this course does not require any prior business knowledge or experi­ence. I don’t assume you’re already the CEO of a large company that makes multimillion-dollar decisions on a daily basis. (But this course will still be very useful if you are!)

If you do have business experience, take it from many of clients around the world who have MBAs from top schools—you’ll find the in­formation in this course more valuable and practical than anything you learned earning your degree.

Together, we’ll explore 226 simple concepts that help you think about business in an entirely new way. After reading this course, you’ll have a much more comprehensive and accurate understanding of what businesses actu­ally are and what successful businesses actually do.

________ Questions, Not Answers_____

Education is not the answer to the question. Education is the means to the answer to all questions.

—BILL ALLIN, SOCIOLOGIST AND EDUCATION ACTIVIST

Most business courses attempt to teach you to have more answers: a tech­nique for this, a method for that. This course is different. It won’t give you answers—it will help you ask better questions. Knowing what’s critically important in every business is the first step in making good business deci­sions. The more you know about the essential questions to ask in your cur­rent situation, the more quickly you’ll be able to find the answers you need to move forward.

Mental Models, Not Methods

The limits of my language are the limits of my world.

—LUDWIG WITTGENSTEIN, PHILOSOPHER AND LOGICIAN

To improve your business skills, you don’t need to learn everything there is to know—mastering the fundamentals can take you surprisingly far. I call these foundational business concepts mental models, and together, they create a solid framework you can rely on to make good decisions.

Mental models are concepts that represent your understanding of “how things work.” Think of driving a car: what do you expect when you press down on the right-side pedal? If the car slows down, you’ll be surprised— that pedal is supposed to be the accelerator. That’s a mental model—an idea about how something works in the real world.

Your brain forms mental models automatically by noticing patterns in what you experience each day. Very often, however, the mental models you form on your own aren’t completely accurate—you’re only one person, so your knowledge and experiences are limited. Education is a way to make your mental models more accurate by internalizing the knowledge and ex­periences other people have collected throughout their lives. The best edu­cation helps you learn to see the world in a new, more productive way.

For example, many people believe things like “starting a business is risky,” “to get started, you must create a massive business plan and borrow a lot of money,” and “business is about who you know, not what you know.” Each of these phrases is a mental model—a way of describing how the world works—but they’re not quite accurate. Correcting your mental mod­els can help you think about what you’re doing more clearly, which will help you make better decisions:

INACCURATE MENTAL MODELACCURATE MENTAL MODEL
Starting a business is risky.Uncertainty is an ever-present but manageable part of business, and risks can be minimized.
In order to successfully create a business, you must create a flawless business plan before you start your business.A written plan is secondary to understanding the critical functions of your business, and no matter how much you prepare, there will always be surprises along the way.
You must raise large amounts of capital before you start building your business.Raising money is necessary only if it allows you to accomplish something that would otherwise be impossible (like building a factory).
It’s not what you know, it’s who you know.Personal connections are important, but knowledge is key if you want to use those connections to your best advantage.

After learning the mental models in this course, many of my clients have realized that their picture of what businesses are and how businesses work was inaccurate—getting their venture off the ground would be far easier than they originally imagined. Instead of wasting valuable time and energy feel­ing intimidated and freaking out, learning these concepts gave them the freedom to stop worrying and start making progress.

This course will help you learn the fundamental principles of business quickly so you can focus your time and energy on actually doing useful things: creating something valuable, attracting attention, closing more sales, serving more customers, getting promoted, making more money, and chang­ing the world.

Not only will you be able to create more value for others and improve your own financial situation, you’ll also have more fun along the way.

A Sell-Directed Crash Course in Business

Many who are self-taught far excel the doctors, masters, and bach­elors of the most renowned universities.

—LUDWIG VON MISES, AUSTRIAN ECONOMIST AND AUTHOR OF HUMAN ACTION

  1. Large companies move slowly. Good ideas often died on the vine simply because they had to be approved by too many people.
  2. Climbing the corporate ladder is an obstacle to doing great work. I wanted to focus on getting things done and making things better, not constantly positioning myself for promotion. Politics and turf wars are an inescapable part of the daily experience of working for a large company.
  3. Frustration leads to burnout. I wanted to enjoy the daily experience of work, but instead I felt like I was running a gauntlet each day. It began to affect my health, happiness, and relationships. The longer I stayed in the corporate world, the more I realized I wanted out. I desperately wanted to work on my own terms, as an entrepreneur.

The Wheat and the Chaff

It is important that students bring a certain ragamuffin, barefoot ir­reverence to their studies; they are not here to worship what is known, but to question it.

—JACOB BRONOWSKI, WRITER AND PRESENTER OF THE ASCENT OF MAN

If there’s one thing I’m good at, it’s taking in a huge amount of information and distilling it to the essentials. I’m a synthesist by nature, and my travels through the world of business literature quickly became an exercise in separating the diamonds from the rough.

The amount of business information being published every day is stag­gering. As of this writing, the Library of Congress has approximately 1.2 million business-related books in its general collection. Assuming you read at an average speed of250 words per minute and an average book contains 60,000 words, it would take 528 years of around-the-clock reading to finish the entire collection, 822 years if you allowed yourself the luxury of food and sleep.

According to Bowker, the company responsible for assigning ISBN num­bers for the publishing industry, over 11,000 new business books are pub­lished worldwide each year, adding to the millions of business books printed since the early 1900s. Amazon.com carries over 630,000 business-related ti­tles, not counting audiobooks, e-books, or materials that are published without an ISBN.

Of course, books aren’t the only source of business information available. Take magazines and newspapers, for example: 527 major business-related periodicals are currently tracked by the Wilson Business Periodicals Index. Every year, the WBPI adds over 96,000 records to its database of 1.6 mil­lion entries. That figure doesn’t include blogs: according to Google Blog Search, there are currently over 110 million business-related blog posts on the Internet—a figure that is growing daily. There’s certainly no shortage of business writers in the blog world: the blog search engine Technorati has indexed over 4 million bloggers who write about business-related topics.

Clearly, sifting through the massive amount of business information available would be an enormous challenge. My early business research was mostly haphazard—I simply went to a bookstore and picked up a book that looked interesting. For every great book I found, I had to wade through ten times as many hastily assembled texts by consultants who were more inter­ested in creating a three-hundred-page business card than providing genu­inely useful information.

I started to wonder: how much of what’s out there—and there’s a lot out there—I really needed to know. How could I separate the valuable informa­tion from the rubbish? I only had so much time and energy, so I started searching for a filter: something that would direct me to the useful knowl­edge and keep me away from the chaff. The more I searched, the more I realized it didn’t exist—so I decided to create it myself.

I began tracking which resources were valuable and which ones weren’t, then publishing my findings on my Web site, both as an archive and for the benefit of anyone interested. It was a personal project, nothing more: I was just a recent college graduate doing my best to learn something useful, and publishing my research for others seemed like a good use of time and energy.

One fateful morning, however, the MBA went unexpectedly public, and my life changed permanently.

The MBA Goes Global

Whoever best describes the problem is the one most likely to solve it.

—DAN ROAM, AUTHOR OF THE BACK OFTHE NAPKIN

In addition to reading course, I was following several hundred business blogs. Some of the best business thinking was being published on the In­ternet months (or years) before it ever appeared in print, and I wanted to read it all as soon as it was available.

One of the bloggers I followed avidly was Seth Godin. A best-selling author (of books like Permission Marketing, Purple Cow, and Linchpin) and one of the earliest successful online marketers, Seth specializes in bold statements of big ideas designed to challenge you to do more, do better, question the status quo, and make a difference.

One particular morning, Seth was commenting on a recent news story:

Harvard was rescinding the admission of 119 previously soon-to-be Har­vard MBA students.1 These prospective students had discovered an ethi­cally dubious way to hack into the Harvard admissions Web site to view their application status before the official acceptance letters went out. The story quickly became a media frenzy, devolving into a debate about whether MBA students were naturally inclined to lie, cheat, and steal, or if business schools made them that way.

Instead of being outraged at the bad behavior of the applicants, Seth (unsurprisingly) had a different perspective: Harvard was giving these stu­dents a gift. By rescinding their applications, Harvard was giving these students a significant opportunity: the university was returning $150,000 and two years of their lives, which would otherwise have been spent chas­ing a mostly worthless piece of paper. “It’s hard for me to understand,” he wrote, “why [getting an MBA] is a better use of time and money than ac­tual experience combined with a dedicated reading of 30 or 40 books.”

“Holy cow,” I thought. “That’s exactly what I’m doing!”

Over the next two days, I created a list of the books and resources I had found most valuable in my studies,2 then published it on my blog with a link to Seth’s post, so anyone interested in figuring out how to do what Seth suggested would be able to find it. Then I typed a quick e-mail to Seth and sent him a link to my post.

Two minutes later, a post went up on Seth’s blog directing people to my reading list, and a flood of readers from around the world started visiting my Web site.

Popular personal development and productivity blogs like Lifehacker .com picked up the story, which then spread to social media Web sites like Reddit, Digg, and Delicious. Within the first week of the Personal MBA’s existence, thirty thousand people visited my little corner of the Internet to see what I was doing. Better yet, they started talking.

Some readers asked questions—where should they start? Others sug­gested great books they’d read, helping me with my research. A few told me the entire project was naive, and that I was wasting my time. Through it all, I kept reading, researching, and developing the Personal MBA in my spare time, and the business self-education movement began to snowball.

“The Personal MBA Manifesto,”3 an essay I created to help newcomers

understand what the project is all about, has been viewed hundreds of thousands of times by readers all over the world and is still in the top ten manifestos published by ChangeThis.com after five years. The Personal MBA recommended reading list has been profiled by BusinessWeek4 and has been updated with the results of my latest research every year since 2005. Thousands of do-it-yourself business students from around the world help one another learn and grow every day in the PMBA Community forums.5

In an amazingly short period of time, the Personal MBA grew from a one-man side project into a major global movement, and I left P&G to focus on building the PMBA and working with my clients full-time.

As much as I enjoyed leading the efforts of the worldwide PMBA com­munity, I quickly realized that providing a reading list wasn’t enough. Peo­ple read business books to solve specific challenges or to improve themselves in some tangible way. They’re looking for solutions, and a list of books, while valuable, could only do so much.

The books themselves aren’t as important as the ideas and knowledge they contain, but many of my readers were missing out because it took hours of turning pages to get to the good stuff. Many MBA students started enthusiastically, then quit after reading a few books—it took too long to reap the rewards, and the demands of work and family life inevita­bly intervened.

To help them, I had more work to do.

_______ Mental Models______

I think it’s undeniably true that the human brain works in models. The trick is to have your brain work better than the other person’s brain because it understands the most fundamental models—the ones that do the most work.

—CHARLES T. MUNGER, BILLIONAIRE BUSINESS PARTNER OF WARREN BUFFETT, CEO OF WESCO FINANCIAL, AND VICE-CHAIRMAN OF BERKSHIRE HATHAWAY

iy first glimpse into the future of the Personal MBA came in the work of Charles T Munger.

Charlie was born in Omaha, Nebraska, shortly before the Great De­pression. As a young man, Charlie skipped high school athletics in favor of reading to satisfy his intense curiosity about how the world worked. His early business experience consisted of working in a family-owned grocery store for $2 a day.

In 1941, Charlie graduated from high school. After two years of studying undergraduate mathematics and physics at the University of Michigan, he enlisted in the Army Air Corps, where he was trained as a meteorologist. In 1946, after leaving the army, he was accepted to Harvard Law School, even though he had never earned a bachelor’s degree, which wasn’t absolutely required at the time.

Charlie graduated from Harvard Law in 1948 and spent the next sev­enteen years practicing as an attorney. In 1965, he left the law firm he had created to start an investment partnership, which went on to outperform the market by 14 percent compounded annually over fourteen years—an astounding record given his complete lack of formal business education.

Charlie Munger isn’t a household name, but Warren Buffett, Charlie’s business partner, certainly qualifies. Buffett and Munger purchased Berk­shire Hathaway, a floundering textile manufacturer, in 1975, turning it into a conglomerate investment holding company.Together, Buffett and Munger became billionaires.

According to Buffett, Charlie’s mental-model-centric approach to busi­ness is a major contributing factor in the success of Berkshire Hathaway and Buffett’s status as one of the world’s wealthiest business owners: “Char­lie can analyze and evaluate any kind of deal faster and more accurately than any man alive. He sees any valid weakness in sixty seconds. He’s the perfect partner.”6

The secret to Charlie’s success is a systematic way of understanding how businesses actually work. Even though he never formally studied business, his relentless self-education in a wide variety of subjects allowed him to construct what he called a “latticework of mental models,” which he then applied to making business decisions:

I’ve long believed that a certain system—which almost any intelligent

person can learn—works way better than the systems most people use [to

understand the world]. What you need is a latticework of mental models

in your head. And, with that system, things gradually fit together in a way that enhances cognition.

Just as multiple factors shape every system, multiple mental models from a variety of disciplines are necessary to understand that system . . .

You have to realize the truth of biologist Julian Huxley’s idea that, “Life is just one damn relatedness after another.” So you must have all the models, and you must see the relatedness and the effects from the relatedness . . . 7

It’s kind of fun to sit here and outthinkpeople who are way smarter than you are because you’ve trained yourselfto be more objective and more mul­tidisciplinary. Furthermore, there is a lot of money in it, as I can testify from my own personal experienced

By basing their investment decisions on their extensive knowledge of how businesses work, how people work, and how systems work, Buffett and Munger created a company worth over $195 billion—an astounding track record for a meteorologist-turned-lawyer from Omaha with no formal business education.

Discovering Munger’s approach to business education was a huge vali­dation. Here was a man who, decades before, had decided to do what I was doing—and it had worked extraordinarily well! Munger’s method of identifying and applying fundamental principles made much more sense to me than most of the business books I’d previously read. I resolved to learn everything I could about the “mental models” Charlie used to make decisions.

Unfortunately, Charlie has never published a comprehensive collection of his mental models. He’s given hints in his speeches and essays—even going so far as to publish a list of the psychological principles he finds most useful in Poor Charlie’s Almanack, a recent biography—but there was no single text that contained “everything you need to know in order to succeed in business.”

If I wanted to understand the fundamental principles of how every suc­cessful businessperson works, I’d have to discover them myself. To do that, I had to rebuild my understanding of business from the ground up.

________ Connecting the Dots______

In all affairs, it’s a healthy thing now and then to hang a question mark on the things you have long taken for granted.

—BERTRAND RUSSELL, RENOWNED PHILOSOPHER AND AUTHOR OF THE

PROBLEMS OF PHILOSOPHY AND THE PRINCIPLES OF MATHEMATICS

Most business books (and business schools) assume that the student al­ready knows what businesses are, what they do, and how they work—as if it were the most obvious thing in the world. It’s not. Business is one of the most complex and multidisciplinary areas of human experience, and trying to understand how businesses work can be remarkably intimidating, even though they surround us every day.

Businesses are so much a part of daily life that it’s easy to take the busi­ness world for granted. Day after day, businesses deliver what we want swiftly, efficiently, and with remarkably little fuss. Look around: almost every material good you’re surrounded by right now was created and deliv­ered to you by some sort of business.

Businesses invisibly create and deliver so many different things in so many different ways that it makes generalizations difficult: what do apple cider and airlines have in common? As it turns out, quite a bit—if you know where to look. Here’s how I define a business:

Every successful business (1) creates or provides something of value that (2) other people want or need (3) at a price they’re willing to pay, in a way that (4) satisfies the purchaser’s needs and expectations and (5) pro­vides the business sufficient revenue to make it worthwhile for the owners to continue operation.

Take away any of these things—value creation, customer demand, transactions, value delivery, or profit sufficiency—and you have something other than a business. Each factor is both essential and universal.

As I deconstructed each of those factors, I found additional universal requirements. Value can’t be created without understanding what people want (market research). Attracting customers first requires getting their attention, then making them interested (marketing). In order to close a sale, people must first trust your ability to deliver on what’s promised (value delivery and operations). Customer satisfaction depends on reliably exceed­ing the customer’s expectations (customer service). Profit sufficiency re­quires bringing in more money than is spent (finance).

None of these functions is rocket science, but they’re always necessary, no matter who you are or what business you’re in. Do them well, and your business thrives. Do them poorly, and you won’t be in business very long.

Every business fundamentally relies on two additional factors: people and systems. Every business is created by people and survives by benefiting other people in some way. To understand how businesses work, you must have a firm understanding of how people tend to think and behave—how humans make decisions, act on those decisions, and communicate with others. Recent advances in psychology and neuroscience are revealing why people do the things they do, as well as how to improve our own behavior and work more effectively with others.

Systems, on the other hand, are the invisible structures that hold every business together. At the core, every business is a collection of processes that can be reliably repeated to produce a particular result. By understanding the essentials of how complex systems work, it’s possible to find ways to improve existing systems, whether you’re dealing with a marketing cam­paign or an automotive assembly line.

Before writing this book, I spent several years testing the principles in this book with my clients and readers. Understanding and applying these “business mental models” has helped them launch new careers, land job offers from prestigious organizations in the corporate and academic worlds, get promoted, start new businesses, and in several cases go through the entire product development process (from idea to first sale) in less than four weeks.

These concepts are important because they work. Not only will you be able to create more value for others and improve your own financial situa­tion, you’ll find it noticeably easier to achieve what you set out to do—and you’ll have more fun along the way.

_________ Foi the Skeptics______

You wasted $150,000 on an education you could have got for a buck fifty in late charges at the public library.

—MATT DAMON AS WILL HUNTING, GOOD WILL HUNTING

This is a book about business concepts, not business schools. However, many people simply don’t believe it’s possible to reap the benefits of a com­prehensive business education without forking over enormous sums of money for a name-brand diploma from an Ivy League school. This section, which will discuss the merits and downfalls of traditional MBA programs, is for the skeptics.

Should You Go to Business School?

There is a difference between (A) what an MBA does to help you prove your abilities to others and (B) what getting an MBA actually does to improve your abilities. They are two different things.

—SCOTT BERKUN, AUTHOR OF MAKING THINGS HAPPEN AND THE MYTHS OF INNOVATION

Every year, millions of individuals determined to make a name for them­selves have the following thought: “I want to become a successful business­person. Where should I get my MBA?” Since you’re flipping through this book, you’ve probably wondered the same thing at some point in your life.

Here’s the answer: five simple words that will save you years of effort and hundreds of thousands of dollars:

Skip business school. Educate yourself.

This course will show you how to succeed in business—without mortgag­ing your life.

Three Big Problems with Business Schools

College: two hundred people reading the same book. An obvious mistake. Two hundred people can read two hundred books.

—JOHN CAGE, SELF-TAUGHT WRITER AND COMPOSER

have nothing against people who work in business schools: by and large, business school professors and administrators are lovely people who try their best and want to see their students succeed. Unfortunately, MBA programs around the world have three major systemic issues:

  1. MBA programs have become so expensive you must effectively mort­gage your life to pay the price of admission. “Return on Investment” is always directly related to how much you spend, and after decades of tuition increases, MBA programs are increasingly a burden to their students instead of a benefit. The primary question is not whether attending a university is a positive experience: it’s whether or not the experience is worth the cost.9
  2. MBA programs teach many worthless, outdated, even outright damag­ing concepts and practices—assuming your goal is to actually build a successful business and increase your net worth. Many of my MBA- holding readers and clients come to me after spending tens (sometimes hundreds) of thousands of dollars learning the ins and outs of com­plex financial formulas and statistical models, only to realize that their MBA program didn’t teach them how to start or improve a real, oper­ating business. That’s a problem—graduating from business school does not guarantee having a useful working knowledge of business when you’re done, which is what you actually need to be successful.
  3. MBA programs won’t guarantee you a high-payingjob, let alone make you a skilled manager or leader with a shot at the executive suite. Devel­oping skills such as decision making, management, and leadership takes real practice and experience, which business schools can’t pro­vide in the classroom, regardless of how prestigious the program is.

Instead of spending huge sums of money to learn marginally useful information, you can spend your time and resources learning things that

actually matter. If you’re ready and able to invest in improving your skills and abilities, you can learn everything you need to know about business on your own, without mortgaging your life for the privilege.

Delusions

The very substance of the ambitious is merely the shadow of a dream.

—WILLIAM SHAKESPEARE, HAMLET

t’s easy to figure out why business school is attractive: it’s sold as a one-way ticket to a permanently prosperous and comfortable life. It’s a pleasant daydream: after two years of case studies and happy hour “networking,” corporate recruiters will be shamelessly throwing themselves at you, each of them offering a prestigious and high-paying position at a top firm.

Your rise up the corporate ladder will be swift and sure. You’ll be a CAPTAIN OF INDUSTRY, collecting huge bonuses and tabulating the value of your stock options while sitting behind an impressive-looking ma­hogany desk in the corner office on the top floor of a gigantic glass sky­scraper. You’ll be the big boss, telling other people what to do until it’s time to go play golf or relax on your yacht. You’ll be wined and dined all over the world, and the lowly masses will venerate you and your astounding achieve­ments. Everyone will think you’re rich, intelligent, and powerful—and they’ll be damn right.

What price for the promise of riches, power, and glory? A few thousand dollars in application fees, an effortless scribble on a loan document, and you’ll be on your way to the top! Not only that, you’ll get a two-year vaca­tion from actually working. What a fantastic deal!

Unfortunately, daydreams and reality are often quite different.

_______ Your Money AND Your Life_____

There ain’t no such thing as a free lunch.

—ROBERT HEINLEIN, AUTHOR OF STRANGER IN A STRANGE LAND AND THE MOON IS A HARSH MISTRESS

F or the moment, let’s assume you think business school is your ticket to everlasting success. You’re in luck—getting into at least one business school is relatively easy. If you pay thousands of dollars in application fees, write enough personal statements that strike just the right balance of confidence and humility, and compliment the quality of the school’s program in inter­views, sooner or later some college or university will generously bestow upon you the chance to become the next Bill Gates.10

Here, though, is where the problems begin: business school is insanely expensive. Unless you’re independently wealthy or land a massive scholar­ship, your only option is to effectively mortgage your life by taking out an enormous loan against your future earnings to pay the tuition.

Most prospective MBA students have already graduated from college with an undergraduate degree, so they’re already carrying some level of student loan debt. According to FinAid.org, a college financial aid Web site, the average cumulative debt of a student who completed an under­graduate degree in the United States in 2009 is $22,500. For students who choose to pursue an MBA program after undergrad, total average cumula­tive debt is $41,687. That doesn’t include providing for material needs like rent, groceries, and car payments, which are often funded via additional student loans.

Forty thousand dollars is a significant chunk of change, assuming you go to an average school—but who wants to be merely average? If you’re shoot­ing for offers from top-tier financial services companies like Goldman Sachs or major consulting companies like McKinsey and Bain (which are histori­cally the highest-paying options for newly minted MBAs), you’re going to have to attend a top-ten program, and that’ll require a lot more than a mea­sly forty grand.

Bieaking Out the Benjamins

Who goeth a borrowing, goeth a sorrowing . . . A fool and his money are soon parted.

—THOMAS TUSSER, SIXTEENTH-CENTURY ENGLISH FARMER AND POET

According to the 2010 U.S. News & World Report business school rankings, each of the top fifteen MBA programs charge $40,000 to $50,000 per year for tuition. Most full-time MBA programs are two-year affairs. Once you factor in the high cost of living near any major university, you’re easily look­ing at a total price tag of somewhere between $125,000 and $200,000 for a b-school diploma. Assuming you get in, of course.

Top business schools are notoriously hard to get into—the programs can afford to be picky because of their reputations. It’s circular. The reputa­tion of a business school is built on the success of its graduates, so the top schools only admit those students intelligent and ambitious enough to make it through the rigorous selection process—the ones who are already likely to succeed, MBA or no MBA. Business schools don’t create successful people. They simply accept them, then take credit for their success.

If you get in, the school will do what it can to help you get a decent job, but making things happen will always be your responsibility. If you’re suc­cessful in the years after graduation, the school will hold you up as a shining example of the quality of their program and will use the “halo effect” of your name to recruit more students. If you lose your job and go broke, you’ll get neither publicity nor help, but the loan bills will keep rolling in. Sorry about your luck.

Here’s what Christian Schraga, a 2002 graduate of the Wharton School of Business, had to say about his MBA experience in an essay on his Web site:11

My been-there-done-that experience has taught me that a top MBA pro­gram provides some benefits, but at a steep price. If you are currently considering attending a full-time program, please stop to ask yourself whether or not you are willing to take the risk.

Business school is a big risk. Should you choose to enroll, the only cer­tainty is that you will shell out about $125,000. Such a figure correlates

to a $1,500/month non-deductible loan repayment and a ten-year period of time in which you will not be able to save a red cent.

If you think that this payment is worth it to earn the pedigree, the fraternity, the two years off, and a shot at the big bucks, then the MBA is right for you. If not, please do something else.

Wise words. If you don’t absolutely need the sheepskin, don’t enroll.

What an MBA Will Actually Get You

Hypocrisy can afford to be magnificent in its promises; for never intending to go beyond promises, it costs nothing.

—EDMUND BURKE, POLITICIAN AND POLITICAL THEORIST

n “The End of Business Schools? Less Success Than Meets the Eye,” a study published in Academy of Management Learning & Education,12 Jeffrey Pfeffer of Stanford University and Christina Fong of the University of Washington analyzed forty years of data in an effort to find evidence that business schools make their graduates more successful. Their hypothesis was remarkably straightforward:

If an MBA education is useful training for business, then the following should be true as a matter of logic: (1) having an MBA degree should, other things being equal, be related to various measures of career success and attainment, such as salary; and (2) if what someone learns in business school helps that person be better prepared for the business world and more competent in that domain—in other words, if business schools convey pro­fessionally useful knowledge—then a measure of how much one has learned or mastered the material, such as grades in course work, should be at least somewhat predictive of various outcomes that index success in business.

What Pfeffer and Fong found was astonishing and disturbing: business schools do almost nothing, aside from making money disappear from stu­dents’ pockets:

Business schools are not very effective: Neither possessing an MBA degree nor grades earned in courses correlate with career success, results that ques­tion the effectiveness of schools in preparing their students. And, there is little evidence that business school research is influential on management practice, calling into question the professional relevance of management scholarship.

According to Pfeffer and Fong’s study, it doesn’t matter if you graduate at the top of your class with a perfect 4.0 or at the bottom with a barely passing grade—getting an MBA has zero correlation with long-term career success. None.

There is scant evidence that the MBA credential, particularly from non­elite schools, or the grades earned in business courses—a measure of the mastery of the material—are related to either salary or the attainment of higher level positions in organizations. These data, at a minimum, suggest that the training or education component of business education is only loosely coupled to the world of managing organizations.

That’s tough to hear if you’ve forked over a few hundred thousand dol­lars to buy a degree whose sole purpose is to make you a more successful businessperson.

It gets worse: getting an MBA doesn’t even have an impact on your total lifetime earnings. It takes decades of work simply to dig yourself out of the debt you took on to get the degree. Christian Schraga, the Wharton MBA, estimated that the ten-year “net present value” (a financial analysis tech­nique used to estimate whether or not an investment is worthwhile) of a top MBA program is approximately negative $53,000 (that’s bad). This assumes a pre-MBA base salary of $85,000, a post-MBA salary of $115,000 (a 35 percent increase), marginal tax rate increases (which you’ll pay if your job requires moving to a major city), and a discount rate of 7 percent to account for opportunity cost (the opportunities you give up by spending money on business school instead of investing it in something else). In plain English: Schraga used a technique business schools teach to prove that getting an MBA from a top-tier school is a bad financial decision.

Assuming Schraga’s assumptions are accurate, it takes twelve years of solid effort just to break even—and that’s assuming everything goes accord­ing to plan. If you graduate into a bad job market, you’re screwed.

Where Business Schools Came From

It is, in fact, nothing short of a miracle that modern methods of in­struction have not entirely strangled the curiosity of inquiry.

—ALBERT EINSTEIN, NOBEL PRIZE-WINNING PHYSICIST

MbA programs don’t make students more successful because they teach very few things that are actually useful in the working world. As Pfeffer and Fong state in their paper:

A large body of evidence suggests that the curriculum taught in business schools has only a small relationship to what is important for succeeding in business . . . If there is, in fact, only a slight connection between the skills needed in business and what is taught in graduate business pro­grams, then the absence of an effect of the MBA or mastery of the subject matter on the careers of graduates is understandable.

If you look at the curriculum of any business school, you’ll notice a few assumptions about what you’ll do after you graduate: you’ll either be a C-level executive at a large industrial manufacturing or retail operation, become a consultant, become a corporate accountant, or work as a financier at an investment bank. Accordingly, the coursework is implicitly structured around keeping your massive operation running and/or doing sophisticated quantitative analysis—not doing any of the other critically important things that 99 percent of working businesspeople do in any given day.

The disconnect between the classroom and the working world makes sense when you realize that the concepts, principles, and techniques most business schools teach were designed for a very different world. Graduate schools of business started popping up at the end of the nineteenth century during the Industrial Revolution. The intent of early MBA programs was to train managers to be more scientific in an effort to make large operations more efficient.

Frederick Winslow Taylor, the pioneer of “scientific management” tech­niques that now form the foundation of modern management training, used a stopwatch to shave a few seconds off the average time a workman took to load iron ingots into a train car. That should give you a good idea of the underlying mind-set of most business school management programs.

Management was thought of mostly as an exercise in getting people to work faster and do exactly what they’re told. The philosopher kings behind what passed for management psychology were Ivan Pavlov and, later on, B. F. Skinner, who believed that if you discovered and applied just the right stim­ulus, people would behave however you wanted. This mentality led to the widespread use of financial incentives to influence behavior: salary, bonuses, stock options, and so on, in an effort to encourage business professionals and managers to act in the best interest of corporate shareholders.

There’s an enormous (and growing) body of evidence that direct incen­tives often undermine performance, motivation, and job satisfaction in the real world.13 Despite more useful competing theories of human action,14 the search for the magic stimulus continues in business school classrooms to this day.

In Search ol Distribution

Any technique, however worthy and desirable, becomes a disease when the mind is obsessed with it.

—BRUCE LEE, WORLD-RENOWNED MARTIAL ARTIST

Marketing, on the other hand, was originally a way to get additional store distribution for physical products and keep expensive factory production lines busy. With the widespread adoption of the radio and television in the early twentieth century, it became possible to advertise to a large national audience, paving the way for national brands and national retailers. More advertising typically resulted in more distribution, which in turn resulted in more sales and even more money to spend on advertising, continuing the cycle. As decades passed, this self-reinforcing feedback loop resulted in a few dominant behemoths in each industry. Business schools became obsessed with how to capture market share and create gigantic companies quickly via ever-larger mergers, raising the financial stakes with each acquisition.

For entrepreneurs, venture capital became a must-have aspect of the business process—how else could you afford to build a factory or a national brand in a few short years? “Economies of scale” in production meant large companies could outcompete smaller rivals by offering similar products at lower prices. Investors wanted to see huge returns on their money quickly, prudence be damned, rewarding speculators who wrote business plans promising a huge exit in a short amount of time. Viable businesses were acquired and gutted in the name of conglomeration and “synergy,” all with the blessing of business academia. The sheer enormity of integrating these gigantic, complex business systems was ignored or overlooked, leading most of the companies that attempted huge mergers to ruin.

_________ Playing with File______

Beware of geeks bearing formulas.

—WARREN BUFFETT, CHAIRMAN AND CEO OF BERKSHIRE HATHAWAY AND ONE OF THE WEALTHIEST INDIVIDUALS IN THE WORLD

F inance, in the meantime, was steadily increasing in complexity. Before the twentieth century, accounting and finance were a matter of common sense and relatively simple arithmetic. The widespread adoption of double-entry bookkeeping (a thirteenth-century innovation) brought many benefits, like increased accuracy and ease of detecting anomalies like theft, at the cost of simplicity.

The introduction of statistics to financial practice simultaneously en­hanced analytical capability at the cost of abstraction, increasing opportu­nities to fudge the numbers without anyone noticing. Over time, managers and executives began using statistics and analysis to forecast the future, relying on databases and spreadsheets in much the same way ancient seers relied on tea leaves and goat entrails. The world itself is no less unpredict­able or uncertain: as in the olden days, the signs only “prove” the biases and desires of the soothsayer.

The complexity of financial transactions and the statistical models those transactions relied upon continued to grow until few practitioners fully understood how they worked or respected their limits. As Wired revealed in a February 2009 article, “Recipe for Disaster: The Formula That Killed Wall Street,” the inherent limitations of deified financial formulas such as the Black-Scholes option pricing model, the Gaussian copula function, and the capital asset pricing model (CAPM) played a major role in the tech bubble of2000 and the housing market and derivatives shenanigans behind the 2008 recession.

Learning how to use complicated financial formulas isn’t the same as learning how to run a business. Understanding what businesses actually do to create and deliver value is essential knowledge, but many business pro­grams have de-emphasized value creation and operations in favor of finance and quantitative analysis. In “Upper Mismanagement,” journalist Noam Scheiber explores the reason behind the downfall of American industry:

Since 1965, the percentage of graduates of highly ranked business schools who go into consulting and financial services has doubled, from about one-third to about two-thirds. And while some of these consultants and financiers end up in the manufacturing sector, in some respects that’s the problem . . . Most of GMs top executives in recent decades hailed from a finance rather than an operations background. (Outgoing GM CEO Fritz Henderson and his failed predecessor, Rick Wagoner, both worked their way up from the company’s vaunted Treasurer’s office.) But these executives were frequently numb to the sorts of innovations that enable high-quality production at low cost.15

Process improvements are easy to skip if you want the business’s short­term profit numbers to look good, even though they’re essential to long­term viability. By ignoring the things that make a business operate more effectively, MBA-trained executives have unwittingly gutted previously vi­able companies in the name of quarterly earnings per share.

Meanwhile, the widespread practice of using large amounts of debt as leverage16 created enormous companies with even more enormous obliga­tions, amplifying returns in good years but making the firms catastrophi­cally unstable during the slightest downturn. The “leveraged buyout” strategy taught in many business school classrooms—buying a company, financing massive expansion via debt, then selling the business to another company at a premium17—turned formerly self-sustaining companies into debt-bloated monstrosities, and the constant flipping of businesses from one temporary owner to the next turned financial markets into a game of musical chairs.

When financial wizardry and short-term returns trump prudence and long-term value creation, customers and employees suffer. The only people who benefit are the MBA-trained executive-level financiers and fund man­agers, who extract hundreds of millions of dollars in transaction fees and salaries while destroying previously viable companies, hundreds of thou­sands of jobs, and billions of dollars of value.

Business is about creating and delivering value to paying customers, not orchestrating legal fraud. Unfortunately for us all, business schools have de-emphasized the former in favor of teaching the latter.

________ No Reason In Change______

Schools teach the need to be taught.

—IVAN ILLICH, PRIEST, THEOLOGIAN, AND EDUCATION CRITIC

The world is constantly changing, but business schools aren’t changing with it. With the advent of the Internet and the widespread availability of new technologies, successful modern businesses tend to be smaller, require less capital to build, have less overhead, and require fewer employees. According to the U.S. Small Business Administration, small businesses represent 99.7 percent of all employer firms in the United States, employ half of all private- sector workers, have generated 64 percent of net new jobs over the past fifteen years, and create more than 50 percent of U.S. nonfarm gross do­mestic product (GDP).18 You wouldn’t know that from looking at b-school curricula: based on current standards, it seems that most MBA programs believe huge businesses are the only ventures worth managing.

Mass-market advertising is no longer able to reliably convert pennies to dollars. Inventories (if they exist at all) tend to be smaller, businesses depend on others for critical functions, and markets change and adapt extremely quickly. Speed, flexibility, and ingenuity are the qualities that successful businesses rely on today—qualities that the corporate giants of the past few decades struggle to acquire and retain, and business school classrooms struggle to teach.

The demands of the public market push executives to chase short-term earnings at the expense of long-term stability, creating waves of layoffs and severe budget cuts when times get tight or unexpected events occur. At the same time, more and more employees are looking for a greater sense of autonomy, flexibility, and security from their work—and they’re finding these things outside of the confines of the traditional corporate job. How do you manage someone who doesn’t really want to work for you in the first place?

MBA programs are trying to cope, but they’re still teaching theories that are outdated, misguided, and even outright wrong. Even so, don’t ex­pect them to start doing things differently. Why bother, when MBA pro­grams are profitable status symbols for the colleges and in such high demand? As long as students are still signing up, don’t expect the hallowed halls of business schools to change their tune.

The Single Benefit ill Business Schools

Institutions will try to preserve the problem to which they are the solution.

—CLAY SHIRKY, PROFESSOR AT NYU AND AUTHOR OF HERE COMES EVERYBODY AND COGNITIVE SURPLUS

The one significant benefit that business schools do provide is better access to Fortune 50 recruiters, consulting firms, large accounting firms, and invest­ment banks via on-campus recruiting and alumni networks. Upon graduat­ing from a top-tier business school, you’ll find it much easier to get an interview with a corporate recruiter who works for a Fortune 50, investment bank, or consulting firm. The effect is strongest immediately after gradua­tion, then largely wears out within three to five years. After that, you’re on your own: hiring managers no longer care so much about where you went to school—they care more about what you’ve accomplished since then.

Hiring managers typically use MBA programs as a filter when deciding whom to bring in for an interview. HR managers are busy, and since each student in the program has been prescreened, there’s less of a chance the manager will be wasting precious time. Hiring directly from MBA pro­grams also provides plausible deniability for the recruiter if the hire doesn’t work out: “I’m not sure what the issue was—she graduated from Harvard Business School!”

The filtering aspect of MBA programs is very real, and difficult to over­come on your own. If you have your heart set on becoming a management consultant, international financier, or Fortune 50 fast-track management candidate, you may have to buy yourself a $150,000 interview. If you go this route, be aware of what you’re getting yourself into before you apply—once you sign your life away, the debt will make it very difficult to change your mind.

If you’re more interested in working for yourself or holding down an enjoyable job while having a life, getting an MBA is a waste of time and money. As Dr. Pfeffer says, “If you are good enough to get in, you obviously have enough talent to do well, regardless.”

I Owe, I Owe—It’s Oil to Woif I Go

Are you where you want to be if it doesn’t work?

—LOUIS L’AMOUR, AUTHOR AND HISTORIAN

Let’s say you go ahead and get your MBA. If you’re “lucky,” you may be hired by a big financial services or consulting firm, where you’ll have the privilege of working eighty-plus hours a week for around $100,000 a year. The money is certainly good, but you’ll have a hard time maintaining any sort of life outside of work, and the pressure will be intense and relentless. Even if you don’t like your job, you’d better keep pushing if you want to pay your tuition bills and make your investment “worth it.”

Congratulations: you’ve used your intelligence and drive to condemn yourself to the life of an indentured servant.

If you do a good job, you’ll become an executive, get a raise, and have the privilege of working one hundred-plus hours a week. You’d better not mind enjoying the fruits of your labor alone: top executives consistently have the highest rates of divorce and family relationship issues. As the say­ing goes: you can have anything you want, as long as you’re willing to pay the price.

If you’re not so “fortunate,” you’ll find a job that pays little more than what you’d be able to command without your MBA. Worse yet, graduating into an iffy job market means that you may graduate with a thousand- dollar-a-month loan payment without a job to foot the bill.

An unforgiving job market won’t make student loan payments go away—in the United States, student loan debt cannot be forgiven, even if you declare bankruptcy. Regardless of how your life works out, your student loans will always be there, and your phone will ring with the calls of debt collectors until they’re repaid.

I can’t emphasize this enough: the quickest and easiest way to screw up your life is to take on too much debt. The primary reason people spend decades working in jobs they despise is to pay off their creditors. Financial stress can destroy relationships, threaten your health, and jeopardize your sanity. Is a shot at a desk in a corner office really worth it?

With heavy debt loads and questionable returns, MBA programs simply aren’t a good investment—they’re a trap for the unwary.

__________ A Better Way_______

To educate educators! But the first ones must educate themselves!

And for these I write.

—FRIEDRICH NIETZSCHE, PHILOSOPHER AND AUTHOR OF THE WILL TO POWER

AND THUS SPOKEZARATHUSTRA

F ortunately, you have a choice in how you go about educating yourself—a choice that can make you more successful than top MBA graduates while saving you hundreds of thousands of dollars. Studying the fundamentals of sound business practice and developing a network on your own19 can pro­vide most of the benefits of business education at a fraction of the cost. Instead of wasting your time and hard-earned money learning outdated theories you’ll probably never use, it’s far better to spend your time and energy teaching yourself what you actually need to know to succeed.

If you’re the type of person who’s capable of getting into a top MBA program and doing what it takes to succeed after graduation, skipping business school and learning the fundamentals of business by reading this book may be the best decision you ever make.

What You’ll Learn in This Book

When you first start to study a field, it seems like you have to memo­rize a zillion things. You don’t. What you need is to identify the core principles—generally three to twelve of them—that govern the field.

The million things you thought you had to memorize are simply vari­ous combinations of the core principles.

—JOHN T. REED, REAL ESTATE INVESTMENT EXPERT AND AUTHOR OF SUCCEEDING

This book is designed to teach you the fundamentals of sound business practice as quickly and efficiently as possible. Here’s a quick preview of what you’ll learn:

How Businesses Work. A successful business, roughly defined, pro­vides (1) something of value that (2) other people want or need at (3) a price they’re willing to pay, in a way that (4) satisfies the cus­tomer’s needs and expectations so that (5) the business brings in sufficient profit to make it worthwhile for the owners to continue operation. Together, the concepts in chapters 2 to 6 describe how every business operates and what you can do to improve your results.

How People Work.. Every business is created by people and survives by benefiting other people. To understand how businesses work, you need a firm understanding of how people make decisions, act on those decisions, and communicate with others. Sections 7 to 9 introduce you to a few major concepts in psychology that describe how the human mind processes the world, how you can work more effectively, and how you can create and strengthen professional rela­tionships.

How Systems Work. Businesses are complex systems with many mov­ing parts that exist within even more complex systems like indus­tries, societies, cultures, and governments. Sections 10 to 12 will help you understand how complex systems work, as well as help you analyze existing systems and find ways to improve them without provoking unanticipated consequences.

Here are a few things you shouldn’t expect:

Management and Leadership Overload. Many business resources (and all business schools) conflate management and leadership skills with business skills; they’re not the same thing. While management and leadership are important in the practice of business, they aren’t the be-all and end-all of business education: without solid business knowledge, it’s possible to organize and lead a group of people to­ward the accomplishment of the wrong objectives. Business is about the profitable creation and delivery of valuable offers to paying cus­tomers—management and leadership are simply a means to this end. We’ll discuss the essentials of effective management and leadership in section 9, but in their proper context.

Deep Finance and Accounting. Learning how to manage money is a very important topic that we’ll discuss in section 6, but the ins and outs of managerial accounting and financial analysis are beyond the scope of this book. If you’re interested in exploring these subjects in more detail after learning the fundamentals, I highly recommend Accounting Made Simple by Mike Piper, Essentials of Accounting by Robert N. Anthony and Leslie K. Breitner, The McGraw-Hill 36- Hour Course in Finance for Nonfinancial Managers by Robert Cooke, and How to Read a Financial Report by John A. Tracy.

Quantitative Analysis. Likewise, reading this book won’t help you become a high-flying spreadsheet jockey. Statistics and quantitative analysis are very useful skills when used appropriately, but the ana­lytical techniques themselves are very situational and beyond the scope of this book. If you’re interested in quantitative analysis, I rec­ommend starting with Principles of Statistics by M. G. Bulmer and Turning Numbers into Knowledge by Jonathan G. Koomey.

How to Use this Course

The best effect of any book is that it excites the reader to self­activity.

—THOMAS CARLYLE, ESSAYIST AND HISTORIAN

ere are a few tips that will help you get the most from this course:

Browse, skim, and scan. Believe it or not, you don’t need to read a course cover to cover to benefit: browsing can give you better results with less effort. Periodically skim through this course until you find a section that grabs your attention, then commit to applying that concept to your work for a few days. You’ll begin to notice significant differences in the quality of your work, as well as in your ability to “think like a businessperson.” Keep a notebook and pen handy. The purpose of this book is to give you ideas about how to make things better, so be prepared to capture your thoughts as you have them; it’ll make it easier to review the major concepts later. Your notebook will also make it easy to shift from taking notes to creating detailed action plans as they occur to you.20

Review this book regularly. Keep it close to where you work so you can refer to it often, particularly before starting a new project. Repetition in­evitably leads to mastery, and the better you internalize these concepts, the more you’ll improve your results. I also recommend setting a reminder in your calendar to review this book or your notes every few months to rein­force your understanding and spark new ideas.

There’s always more to explore. Each of these mental models has extremely broad applications, and it’s impossible to explore every ramification of these concepts in a single book. There are many great resources in the world of business literature that can deepen your understanding if you’d like to learn more about a particular mental model. Join me at personalmba.com to explore these ideas in more detail and learn how to apply them to your daily life and work. Let’s begin.