The GMAT Exam: A Call Option on Your Career?
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.
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.
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:
- If you’re definitely going to business school in search of a better career, you need the GMAT to apply.
- 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.”
- 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
- 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 debate over the “value” of business school rages, and there’s no universally correct answer.
The short version is that it can be very valuable… if 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.
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.
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