Slower flow of Harvard MBAs bodes well for Wall Street

Slowing profitability of mega-banks has reduced draw of Wall Street for Ivy League grads.
By Matthew O'Brien, The Washington Post Published: June 1, 2014

Everyone wants to know what the next bubble is, and there’s an easy way to tell: Just watch where Harvard grads are going. Then start shorting.

It's called the Harvard MBA Indicator — though it applies to undergrads, too — and it’s one part psychology, another part economics. The idea is simple enough: It’s a bad sign when more Harvard grads go to Wall Street.

Harvard is a magnet for “organization kids” who excel at coloring between the lines. After graduation, they want to do something prestigious, something remunerative, but mostly, as author Kevin Roose points out, something that gives them new lines to color between. That might be Silicon Valley, or it might be Teach for America — or it might be Wall Street, if, that is, the getting looks good.

And the getting looks best right before a crash, which is when, the argument goes, the Harvard MBA Indicator hits its highest levels, like it did in 1987, in 2000-02 and in 2005-08. As economist Hyman Minsky has explained, financial stability is destabilizing. The longer that markets are calm, the more people plan on them staying that way. People take bigger risks and take on bigger debt because it doesn’t seem like anything can go wrong — until it does, and all this leverage turns small losses into big ones due to forced selling from margin calls.

But this era of complacency can last a long time. And it’s when Wall Street exerts its strongest gravitational pull on Harvard kids. The money keeps getting better and better, and it looks like it always will. All they have to do is follow the Excel-filled road laid out before them.