The GMAT Exam: A Call Option on Your Career?

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GMAT Career OptionsThe MBA.

You naturally want that stamp of approval when you’re up for that next job or promotion.

Well, at least if it’s a stamp of approval from Harvard / Wharton / Stanford as opposed to Unknown University.

If you’re already in the finance industry, you’re probably already considering your options, assigning risk-weights to various plans and figuring out the trade-offs between going to business school now vs. several years from now as your “Plan B” backup option.

But what if you’re not sure about business school? It is, after all, 2 years of unpaid salary and over $160K in costs to cover tuition, books, trips, dinners, and more.

You don’t exactly want to pay for the entire expense upfront if you’re not sure whether or not you really want to go… but the good news is that you don’t have to.

Instead, you could simply take the GMAT exam and consider it a “call option” on your career.

Say What?

If you’re reading this site and don’t know what a call option is, well, I don’t know what to say, but let’s recap the basics just in case:

With a call option on a stock, you pay an upfront fee and then get the right, but not the obligation, to buy the stock at a certain price.

For example, if a company’s stock price is currently $100.00, you might pay $1.16 for a call option to buy the company’s stock when it reaches $105.00 (the exercise price).

You’d have to weigh that cost to buy the option against the probability that the stock will rise above $106.16 ($105.00 + $1.16), meaning that you make a profit, as well as the days until expiration and other factors such as the stock’s volatility, interest rates, and so on.

Call options are interesting because they have potentially asymmetric payoff profiles: you pay a small fixed amount upfront, and the stock price could theoretically appreciate indefinitely, which mean that your profits also keep increasing indefinitely.

Here’s how the analogy applies to the GMAT:

  • Underlying Entity: Your career rather than the stock
  • Option Premium: Cost of the exam and the time required to study for the exam
  • Potential Upside: Infinite, or at least an order of magnitude higher than the cost of the exam
  • Potential Downside: Cost of the exam and the time required to study

No, this analogy doesn’t hold up completely because there’s no “counterparty” to the GMAT exam in the same way that there is for stocks and options, but let’s just ignore that for now.

Ask Yourself…

If there’s even a small chance that you might go to business school in the next 1-5 years, then the risk / reward or cost / benefit profile is greatly skewed in favor of taking the exam.

Even if your answer is a definitive “no,” then it could still make sense to take the exam as a sort of “tail-risk” hedge, given how relatively low-cost it is to acquire.

Think about it this way: options can be used both as speculative instruments (betting that the value of an underlying asset will go up or down), but also as insurance or hedging instruments (protecting against the downside of an existing investment).

There are 3 scenarios for the GMAT:

  1. If you’re definitely going to business school in search of a better career, you need the GMAT to apply.
  2. If there’s a small chance that you may want to attend business school in the future, then it makes sense to take the GMAT as a cheap “insurance policy.”
  3. If disaster strikes and you lose your job, have no solid prospects, and everything else is generally falling apart, taking the GMAT is a sort of “disaster hedge” option that will make the business school application process quicker and easier.

One of Warren Buffett’s most well-known quotes is “You should be fearful when others are greedy and greedy when others are fearful,” and the same principle applies here: you should take the exam when things are going well simply to hedge against something like #3 happening.

You’d much rather take the test when you’re not out of a job and under serious pressure to earn a good score, and then have those results on file for several years if and when you do decide to apply to business school later on.

As anyone who lived through the financial crisis can attest to, these “Black Swan” events tend to happen more than you’d think…

Is the Cost Worth It?

To answer that question, you need to look at everything that’s required for business school:

  • A solid GMAT score
  • Recommendations
  • Essays
  • Work and leadership experience

You can’t just get “great work experience” overnight, or even in the span of a few months, and the same applies to recommendations and essays: it takes years to develop the relationships and experiences you need as the basis of both of those.

It’s also much harder to use any of those as “insurance policies” because you’re attempting to stand out as much as possible with your recommendations, essays, and work experience.

By contrast, it costs far less in time and money to earn a high score on the GMAT, and it’s something that you can do once and then forget about until you actually apply to schools.

Timing = The Expiration Date?

You also need to consider both the real “expiration date” of your results – GMAT scores can only be used for up to 5 years – as well as how old you are and how much work experience you have.

The “optimal age” for most top business schools is anywhere from 26 to 28, and the trend lately is to skew younger – so you’re at a disadvantage if you’re already 30+ and decide that you want to go back to business school.

On the other hand, if you’re 22 and just out of undergraduate, it’s arguably too early to take the exam because you might be applying to schools when you’re 28 or 29 and your scores would be invalid by then.

But if you’re 24 or 25 or even a bit beyond that, it’s a good time to take the exam because your scores will last until you’re 29 or 30 and will therefore be valid during the “ideal age range” at top schools.

Study Time and True Costs

While the GMAT exam itself costs $250 to take, you might also be wondering about the hidden costs such as the time required to study for the exam, courses and books required for it, and so on.

The good news is that it’s not even close to “CFA territory” – you’re looking at 1 to 1.5 months of study in most cases, as opposed to 500+ hours (months and months) of intensive study. Oh, and the exam fee itself is significantly less than the $1100+ required for the CFA.

And the GMAT is useful even if you decide to go into non-finance fields after graduating from business school (hey, I know it’s a stretch but anything’s possible).

Courses and books can add up, but you won’t end up spending a significant amount of money (i.e. thousands of dollars) unless you spring for in-person courses – which are not the best option if you have a busy schedule and long work hours.

The Bottom-Line

The debate over the “value” of business school rages, and there’s no universally correct answer.

The short version is that it can be very valuableif you use it for a specific purpose and you know exactly what your purpose is going into it, e.g. making a major career change such as going from marketing into investment banking and leveraging a top school to get there.

If, on the other hand, you’re just using business school to “take a break” and you wouldn’t advance much by getting the degree, then it’s a tougher case to make (at least if you’re the one paying for it).

However, one thing is certain: regardless of your future intentions to attend or not attend business school, taking the GMAT exam can be a smart “call option” or “insurance policy” that helps you hedge against major risks:

  • What if you lose your job as your bank / company collapses?
  • What if you decide you want to apply to business school, but you’re in a new role that has made you so busy that you don’t have much time to study for the GMAT by the time you’re applying?
  • What if you’ve won a few job offers but don’t have any truly attractive options? If you already have a great GMAT score, you have one additional option to fall back on.

In all those cases, having a good score on record from prior years gives you more options and much-needed peace of mind.

And as in trading, the psychological side to career decisions is huge and should not be underestimated.

It takes some time and effort, but compared to the CFA, getting great work experience, or building relationships with top industry executives, it’s a very modest investment for a potentially high payoff.

And if you’re in your early to mid-20’s, you want to keep your options open and avoid the mistake all too many people make at that age: selling those options and restricting their future plans.

Just ask anyone who graduated in the mid-2000’s and then found themselves in a very different environment a few short years later.

So consider taking the GMAT earlier rather than later – in the worst case scenario, it’s a great way to hedge your downside risk.

And in the best case scenario, you might just benefit from the infinite potential upside – just as you would when you buy a call option in a company’s stock that ends up doubling over and over again.

About the Author

is a Stanford graduate and former management consultant with Booz & Company and derivatives trader on Wall Street. He founded GMAT Pill, a top-rated online GMAT Prep course designed for busy working professionals who want to study less and score more.

The course is known for its efficient framework approach to GMAT questions and also has a complete mobile solution so you can study during your commute or lunch break -- perfect for the investment banker. GMAT Pill is offering a free download of "What's Inside GMAT Pill" and "Being: A Red Flag Word" to M&I readers.

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45 Comments to “The GMAT Exam: A Call Option on Your Career?”

Comments

  1. John Woo says

    Great article! However, I would like to clarify some questions.

    1. When would it be a good time to start preparing of GMAT? Is it a good choice to start preparing for GMAT during my junior/senior year in university?

    2. Is it worth it to pursue a non-ivy league MBA if I plan to work locally (Asia)? How does the value of part time MBA fare against those of full time.

    Thanks a lot and have a nice day.

    • says

      1. No, that is too early. Maybe 2-3 years out of school (assuming you are 24-25 by then).

      2. It’s not worth it unless you are aiming to work in a field outside of traditional IB/PE. Part-time MBAs can still be helpful if they’re from brand name schools, but access to recruiting sometimes isn’t as good.

  2. Thomson&Thompson says

    Great article, but I don’t really get the analogy. Based on your description of the GMAT, the exam seems more like a Credit Default Swap (CDS) than a Call Option. If you think of the GMAT as a CDS, you can use your score to swap your current job (or lack thereof) for an MBA or equivalent from a top b=school. If the GMAT is a call option, however, with your career as the underlying asset, your score would only be useful if the value of your career increases (i.e. your position improves in some way). And why would you want an MBA if your career is improving?

    • Thomson&Thompson says

      Never mind, I just read the article again and I understand the call option analogy (you take the exam when you’re doing well to have the best chance of getting into b-school).

    • says

      Yes, you could argue for either one here I guess. The point is that it gives you more options, and since the scores stay good for 5 years, why not take it earlier on and get it out of the way so you don’t have to think about it later?

  3. Glaxton says

    Wow. What a great article.
    The best I’ve read in a while. More so, because it is so relevant to where I am. Thanks. This has really put my mind at ease.

  4. says

    Hi,

    I have heard that GMAT is very important while recruiting in most Banks.
    How true is that?

    Could you please elaborate on this, as I feel that it is the most important thing about GMAT that all must know.

    Regards

    Stevenk

    • says

      That is not true at all. I mean, it might help if you have a low GPA or lower SAT scores or did not go to a top school, but it wouldn’t help that much. It is 95% about business school admissions.

  5. mike says

    Dropped $1.5k for a in-class Manhattan GMAT class will be done next month. Decided to take the more expensive call option. Great read and would recommend taking the test. Currently 24 – 1 year out of college and not thinking about MBA yet.

  6. George says

    I was wondering what your opinion is on the GRE. I took it recently and scored 99% quant and 86% verbal. Where would the GRE be accepted on par with the GMAT (if anywhere..) ?
    Thanks, great article, keep posting :)

    • says

      They’re sort of separate things… GRE is for normal graduate programs but the GMAT is for business school. Technically, yes, business schools will look at GRE scores but they prefer the GMAT. I would only stick with the GRE if you’re undecided on a normal graduate program vs. MBA.

  7. CC says

    So a bunch of us may be asked to leave in a month’s time in a major BB in London because of headcount issues (might be because they do not want to let the incoming interns know the “truth”). In fact some desks requested that some of us join their teams but this was denied by senior management because of no available headcount. What should we do now? And what should we say to future employers during interviews about why we left after 10 months?

    • M&I - Nicole says

      I am sorry to hear. There is not much you can do because if there’s no headcount, they will have to let people go. I’d suggest you to network internally (other divisions because headcount may be different in other divisions) and externally and look for new positions discretely. Just tell future interviewers that given the economy, [XX] out of the class (Ideally [XX] is a big number) were asked to leave given headcount issues. Since this hasn’t happened yet (and this may not happen), I wouldn’t worry too much about it now.

      • CC says

        Thanks Nicole. Given that this is the case, would it be the norm for them to give a redundancy package? Is there scope to claim for one if they do not?

        • M&I - Nicole says

          Yes banks do give redundancy package. However, given the rounds of layoff in the last few years, I’m not quite sure how favorable the package will be (severance packages are usually more favorable if you’re in the first few round(s) of being let go). I believe you have a notice period – they will have to compensate you the salary of that notice period (minimum). So if you have a one-month notice period, they’ll have to pay you one-month of salary as your severance at the minimum. I don’t think you can claim for “severance” if they have paid your notice fee (I may be wrong). It is best you check with lawyers in your jurisdiction, and I think your contract should state the notice period & compensation if either party terminates the contract

          • CC says

            Thanks! Would it be easier if I say to future interviewers that it is because I like to move back to my home country (rather than because of headcount)? This is because I would rather move back anyway.

  8. Rags to riches says

    Anyone who had to read this article to realize you should take the GMAT to get it out of the way if you might go to b school will not be getting into top tier school. C’mon.

    • says

      Most people, in fact, do not take it early, even if they are able to get into top schools. Dozens of friends have won admission at the top 3 schools and almost no one took the exam years in advance.

      So yes, point taken, but there is a difference between “knowing” you “should” do something vs. actually doing it.

  9. J says

    I dont get it when people say that MBA is a good hedge for career turbulence? You are fired by your bank and the next day you decide to spend all your 2-3 years of banking savings for the business school??!! What a kind of logic is that?

    • says

      You don’t spend your savings on it – you take out loans like everyone else does, so the repayment is gradual. The point is not that you have to do it, but that it is one other option that’s available if you’re willing to take out loans to pay for it.

  10. grey004 says

    I am 27, and currently working in Corporate finance as a project finance analyst at one of the big four defense companies. I want to break into investment banking. What is the direction i need to take to get into Investment Banking? Am i getting to old for Business School?

    BTW: Great site and love reading the articles.

  11. Motedust says

    Hello, first of all I would like to compliment you on the great website, I have learned a lot! This is off-topic but I need advice with regards to a recruiting summer positions vs. full-time.

    I am entering an MSF program and have to decide between 2 semesters and 3 semesters. For IB recruiting would there be a significant benefit to being able to apply for summer analyst positions rather than full-time? The one year program would not allow summer internships clearly and I am questioning whether or not the extra semester, which I suppose allows for 2 OCRs and the option of applying for summer positions is worth it. I am under the impression that most BBs and MMs take a higher amount of people through the summer program compared with full-time recruiting, but I am not 100% sure.

    Thank you!

    • M&I - Nicole says

      Yes I think it is best if you choose the 3 semester option so you can have time to intern, build relationships, and see if the division is right for you. If you already have an offer on hand, then it makes sense to do the 2 semester option.

  12. says

    Guys…I feel that the discussion is a bit derailed….

    Allow me to ellaborate.

    GMAT IS AS IMPORTANT TO ENTER A TOP TIER SCHOOL AS TO RECRUITING.

    Allow me to ellaborate..

    Let’s say that you enter TUCK business school with GMAT 660..

    Lucky you..!Congratulations!!

    Now, you want to break into IB and you apply for an internship..

    You will have to submit them your GMAT score…

    If it is low enough versus the average of the pool then you are out…comfortably out..despite being accepted by a top tier school.

    So GMAT is not the entry point but a score that follows you your entire career…

    My5cents…

    • says

      I mean, maybe, but the school you attended + previous work experience still matter more. I don’t think anyone would say that GMAT at MBA-level recruiting matters as much as GPA does for undergraduate recruiting…

  13. BigMac says

    Hi- Would it ever be worth going back to a target university for a one year master’s programme in a non-finance subject e.g. international relations? The logical premise in my mind being the opportunity to network and a quirky background that might appeal to (finance) employers.

    • M&I - Nicole says

      Yes this may help assuming you will attend the info sessions and will apply through the school’s online system. You’ll have to spin why from non-finance to finance though.

  14. Jason says

    Have you ever heard of anyone networking like crazy but they are still unable to break into the investment banking division?

    • M&I - Nicole says

      Yes, because I don’t know what the rest of their application/pitch looks like, and I don’t know how they interview. His/her subconscious mind matters a lot too (not many people talk about this, but this is probably one of the key factors of success)

      • Jason says

        Someone in banking told me that hiring decisions are a democratic process from the Analyst level all the way to the VP level. Each level has a vote. I read on this site that the MD makes the hiring decision. Do you think it highly depends on the bank and location?

        • M&I - Nicole says

          Yes, usually MD makes the hiring decision though everyone has somewhat of a say. If the MD, D and VP like the candidate and the associate doesn’t, the associate would probably still say yes (may give a reason: yes, but…) so even though it is somewhat of a democratic process, seniors do have more say

  15. Shira says

    I realize that I’m a little young for planning out my entire career, but I’m a high school senior and I’m wondering if business school is an absolute must for those looking to move up in finance. For example, if I’m hoping to eventually become a VP, will it be required that I have my MBA? Or can you still advance in the field with only an undergraduate degree?

    • M&I - Nicole says

      No, it is not a must. You can advance in IB with an undergrad degree as long as you can bring in the revenue (originate deals) as you progress in your career (there are many other factors at play too). With the above being said, it is preferable if you have an MBA from a target school to qualify for some management roles (like global head of ECM/IB etc). Not completely relevant, but you may find this http://www.mergersandinquisitions.com/private-equity-recruiting/ useful

  16. Grey004 says

    When is it too old to go back to school to receive an MBA or be an associate? are there associates who graduate in their early 30s and become investment banking associates? My question has to do with the position itself, are u to old for the position, and are u far behind to reach and MD or any other career path that investment banking brings? What age do you consider to old to get into IBanking.

    • M&I - Nicole says

      Yes some associates are in their early 30s. You may be a few years older than those who got into IB right out of college. You are not too old for the position, and you can still reach MD though it may be you a bit longer. Its really hard to say because some people break into banking from law/medicine background. But if you’re 35+ you’d be considered a bit too old to break into banking.

  17. Neo says

    Hi,

    I am from India. I have total of 6 years of experience in IB (Credit Suisse captive involved financial modelling/preparing pitchbooks etc) and Corporate Development of a $250M IT services company in India (5 M&A/ revenue share/ partnership deals in the range of $10-15M). I have an MBA from Singapore but I graduated in 2009 recession. So I could not get a job there. How do I go about finding a job in Singapore ? I have a decent network in Singapore

    • M&I - Nicole says

      I’d probably set up a few meetings with your network in Singapore and try to look for jobs leads through them. Line up a few interviews. I may line up a few interviews and fly down there. Its always easier to get jobs in another location when you’re physically there.

  18. John says

    Hey, would you say that UMich- Ross is a target school for banks?

    Also, is a 2100 SAT (700 WR, 730 MATH, 670 READING) considered a “good score”? I also got a 780 on the Math II Subject test, would it be worth it to include it on my resume?

    • M&I - Nicole says

      Yes it is a target, though not as prominent as Wharton I believe

      That’s a decent score. You can include your Math score if you want.

  19. Ravneet says

    Hi,

    I am 23 now and currently working as project Engineer in an IT company. I want to develop my career in Human Resource department in any good B-School in Canada. Am i going good if i attempt gmat after a year?

    And what are the chances of getting Scholarship after GMAT?

    • M&I - Nicole says

      I am not familiar with career in HR and scholarships in Canada so I would suggest you connect with business schools regarding their scholarship programs. In terms of moving to HR, yes I think a reputable business school can retool your skills and give you the qualitative edge and managerial skills, making you suitable for HR roles.

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