London Business School - Electives

So I heard back a few weeks ago from London Business School about all the course electives I applied for and I'm happy to say that I got them all. This means that the course I put at the top of my list will also be the last class I end my MBA program on: Service Management Field Trip (aka LBS Greek Study Tour). I've read a few great reviews of this course from other blogs (as well as for the other courses I've choosen) and I'm very happy with the results.

I've just finished my last day at Scotia on Friday and I'm catching up with friends and family before starting my negotiations course in a week's time (you know, that course I kept missing because I kept going on study tours?) I'm taking it with the incoming Morning MBA class so it will be fun to meet them.

Orientation camp is the following week and that looks to be good times. The costume theme this year is super heros and I think I have an awesome idea. I might post a pic after camp is over.

I've got a lot of stuff I need to catch up on, but will start picking up regular posting again soon enough.

Flight of Fancy: What If...? A Market for Bid Points

One common theme I've heard is that MBA's are often upset when they don't get all the elective courses that they want. While I certainly can't complain, it brings up an interesting question: "What if someone like me was able to sell their bid points? What would I get for them? And how would you value them?"

For example, my course choices weren’t very restrictive, I got 500 points to bid on four courses, most of which I could have gotten with a zero bid. Whereas, Mr(s). Ambitious was trying to take TMP and Value Investing while going on Exchange (physically impossible, Value Investing is a year long course and Exchange means you are physically gone). If there existed a mechanism (and therefore a market) for me to transfer my points for a price, what would I get for them? What should they be worth? Clearly, there is currently some "market inefficiency" as we are both unsatisfied: Mr(s). Ambitious because they didn't get all the courses they wanted [net deficiency] and me because I didn't realize the full value of my bid points because I had more than I could use - [net surplus].

Well let’s make some assumptions:

• Rotman tuition is C$35k per year (let’s not include first year as it’s common, or you can adjust the value of points accordingly if you feel second year courses are more / less important)
• You take 10 elective courses in your second year
• You are given 1000 points with which to bid

A “book value” of the points would simply be C$35k / 1000 points or about $35 per point.

But keep in mind that when something is inherently useful, especially in a scenario where a few points margin can mean the difference between getting the course you really want versus having to settle for a less popular course, there can potentially be bidding wars from “oversubscription” (points trade at a multiple above their book value) especially if they were in limited supply.

While people are paying C$70+k to go to school, for a marginal $35 x 100 points (a rough approximation of the average points allocated per student / course) or $3500 you can get any course you want (including the highly coveted TMP and Value Investing – which includes a trip to visit Warren Buffet – one of the reasons why this course is so wildly popular).

If you could some how do it, you could see how much additional probability you have of getting into the classes you wanted and put a dollar value on how badly you wanted to be in that class (regression analysis), you can determine a price you’d be willing to pay to attend that class. For example: Would there be a correlation between the number of points you consumed to get into classes of your choice against your overall earning power once out of university (thinking along the lines of DCF to value bid points like common shares).

And also imagine if this market had a “market maker”. For example, the PSO will (create and) sell you points for a certain value (either regulated and pre-determined or floating with the market). Students could liquidate their points at market value and get money back or buy points of the market to be more competitive for course selection and the school could potentially get revenue from selling points.

And since you have a market with underlying assets, imagine if you created financial instruments for those assets (shorts, puts, and calls for bid points, futures).

And imagine if other schools had market systems (I’m told that bidding systems are not uncommon at other MBA schools), you could trade between these. Or even other programs!

Of course, these points would inherently have an “expiry” as to their value (you wouldn’t want to be holding (take delivery of) 5000 MIT Engineering points if you were going to Stanford Law School).

There are some interesting implications. For instance, a new ranking system for schools where the relative value of a course is determined by the market value (determined by students taking courses there) in real time with comparisons to year over year values. Example: Would an engineering calculus class go for more at Waterloo or Toronto? Could you couple this with flexibility between schools (accreditation programs) which allow students to take equivalent courses at other schools and what do you get?

It would be a more sophisticated and real-time version of tuition regulated by the market. Taken to the extreme, here is another idea: drop the original tuition completely and have students buy bid points for classes. And then what if you were able to connect this market to actual financial markets? An S&P Index of Undergraduate studies to benchmark the valuation of your individual class’ performance.

Another thought: If the value of courses in a particular faculty started to "overheat" would that be a leading indicator of oversupply of labour in a particular industry in 4 years time?

Bidding Strategy - The Mechanics

So I've been lucky enough to receive all the classes I want in all the sections I want and it turns out that LBS doesn't use a "bidding" system per say (classes awarded based on listed "preference" - an ordinal system).

A few people were asking about how my bidding formula works and while it's hardly perfect, I figured I'd put up some of the details just for laughs (or a least as building blocks for someone who plans on taking this model to the next level). It uses only public information available to all students at the time of bidding.

In this model, each course bid is determined by three factors. The first is the inital base and most people will choose one of two initial bases: Last year's minimum bid or last year's median bid (depending on how competitive the class is).

After determining the appropriate bases for your five courses, the remaining points (“the Remainder”) can be divided amongst your courses to make your bids more competitive. But like all dilemmas in bidding, you want to assign just enough points so that you get the courses you want, but not so much that you jeopardize your chances of getting the other courses. So how do you do it?

I propose that the two major factors you should look at are what I call:

1. The Ballot factor (anticipated) (x% of the Remainder, or “X-Factor”)
2. The Historic factor (backward-looking) ([100% - x%] of the Remainder, or the “Y-Factor”)

Where x% is the weight of value of your Ballot factor versus your Historical factor (In other words: how much you believe your Ballot Factor represents real bidding behaviour versus historical).

Ballot Factor:

This factor accounts for the number of people who say they will take the course. A few notes:

• People don’t always bid for the courses they ballot for
• Use the numbers as guidance to see if the course is oversubscribed
• Calculate the expected utilization capacity = total number of students balloting for any course in that section / total class capacity
• Square the utilization capacity to create an “intensity factor”
• Total all the factors and express each factor as a percentage of the total
• Multiply the percentages by the X-Factor
• The result is each individual courses’ Ballot Factor offset

Example:

• 2 classes have a capacity of 40 people each
• You have 200 points allocated to Ballot Factor
• 20 people bid on Class A (fairly certain everyone who bids will get in… There is even a chance that a 0 point bid could win) has utilization 50% and Ballot “intensity factor” of .25
• Class B has 60 bidders has utilization 150% (red flag: guarantee that not everyone will get in) and it’s “intensity factor” is 2.25.
• Class A’s weight is .25/(.25+2.25) = 10%
• Class B’s weight is 2.25 /(.25+2.25) = 90%
• Class A’s Ballot factor offset is 10% * 200 points = 20 points (a non-zero bid with decent margin, you'll probably get in)
• Class B’s Ballot factor offset is 90% * 200 points = 180 points (a strong bid, considering an average of 100)

This model tries to account for the fact that only very high bids will win the competative class, but you also don't want to low ball Class A incase a few stray bids appear from people who take the class last minute (obviously, the less people who originally bid on the class, the less you have to worry about dark horse bidders).

Note that it is 9x because at least 20 people are guaranteed to not get in the class. Classes that are oversubscribed will have intensity factors much higher than 1 with much heavier weights and undersubscribed much lower than 1 with much lower weights. This accounts for the premium on variation and intensity due to the number of bids in a competitive environment. Note that in this pure form, this is a best effort bidding mechanism with the scaling of points to consume all remaining points.

Historical Factor:

Another way to try to guess what the bidding will look like is to use the historical bidding as guidance for the variation of bids (were the bids tight or across a broad range?) One indicator of that is the minimum and median bid. If you make some HUGE assumptions, you can use these two points to create a normal curve with standard deviations. Since the mechanics of this are taught in stats in first quarter, I won’t bore my readers with a poor facsimile of Prof. Krass’ lecture.

Even if you don’t technically know the actual distribution of the curve, you can also use Chebyshev's inequality to position yourself within a certain percentile (also looking at the expected capacity utilization of the class based on your previous calculations). How? Here’s a hint (shown above): the bidding percentiles (% of students bidding that are not successful being admitted into the class) should be the same as the bid oversubscription capacity (again, huge assumptions) to provide the number of standard deviations. Combine this fact with the distance from the median to the minimum should provide a clue as to size of a standard deviation. Note that using this method, you may not (probably won't) have enough points to guarantee getting into the courses you want (unless like me, you probably have a surplus of points or are taking unpopular courses), but it is probably one of the best mechanical methods for balancing aggresive bidding with conserving points as well as building a view for what the bidding landscape looks like. In practical terms, at this point you can use a best effort model similar to the one shown above using the Y-Factor.

Also, I’ve deliberately left out methodology for mechanically scaling up courses based on your individual preferences (ie rating courses from 1 to 10 and incorporating that into your bidding strategy). Also, there are huge economic implications for bidding strategy considering that the involved parties do communicate with each other and affect the bidding levels of courses (ie Friends talk to each other about how they plan to bid). Signalling, game theory and strategy all come into play.

While not perfect, this model will give you some perspective into what a reasonable, very mechanically inclined bid would be. Admittedly, while I built this model, I did do some “emotional” adjustments to my bids (there was one course where I wanted to work with my friends on their team, so I wanted to be CERTAIN that I got the course). Like anything done on a computer, it’s just a tool.

Disclaimer: Like anything on this blog, this model does not guarantee any degree of success. This post is intended as a conversation / pensive reflection piece only. It is possible for you to use this model and not get ANY courses you want. For instance, it is physically impossible to get both Top Management Perspective AND Value Investing because both courses usually require exceptionally high bids. Note that by definition, there will be some people who don't get the courses they want. The more you want to be certain that you are in one course, the less certain that you will be in another (almost like the Heisenberg uncertainty principle). For better or worse, it is a zero-sum game.

Also, more importantly, I've been told that it's all a wash and at the end of the day, after the drop and add periods are over, most people get the courses they want anyways.

Round 1 Bidding Results

Round 1 bidding has ended, and I got every course I wanted in all the sections I wanted. This should come as no huge surprise. I only had to take 4 courses, had a full 500 points and selected courses that weren't very popular / had low bid requirements. I also changed my bid. Rather than bid on Options, I decided to do Case Analysis and Presentation, an intensive course, with a team I think is mostly JD/MBAs who wanted a finance person on their team so I happily joined. I'm hoping that I can overload to take Options as well.

I've heard others were not so lucky. Quite a few people I know (a small non-scientific sample) did not get the courses they wanted or had to get slotted into a different section. I'm guessing this is because they bid for highly competitive courses which cost something absurd like Top Management Perspective (TMP, for 452 min to 548 median) or Value Investing (between 340 min and 360 median). This is in the context of being allocated an initial 100 points per course and with some courses going for 0.

Top Management Perspective is highly coveted (especially by would-be consultants) because there is a lot of meetings with CEOs and other top execs. Value investing is popular because of the annual trip to see Warren Buffet (Caution for anyone interested in this course: The trip could potentially be cancelled at anytime if you notice and read the fine print). Many people I know take Value Investing so that they can "get a photo with Warren that they can use in their promotional material when they start their own hedge funds".

On a modeling note, I'm pretty happy with how my bidding model worked. It predicted that certain courses would be over subscribed and calculated a premium factor for how to bid. For instance, Corp Fin, a normally non-competitive course (three sections of 33 people each), had a minimum bid of 50 (historically 0), meaning that some people were excluded. That means if you mis-read the historic bidding data and thought that you could save some points by bidding 0 (a common strategy for people saving points for TMP and Value Investing) you would have been left out in the cold. I'm thinking of posting my bidding formula later for calculating bid premiums for courses. I'd make some tweaks so that the formulas can be for more general use by students. It benefits everyone if we bid economically rationally.

Electives Bidding Close

Today at 1 pm was the last chance to get your bids in for Round 1 of elective course bidding for next year. I put together a pretty neat spreadsheet (as I'm told MBA students do every year) to mathematically calculate what I should bid based on points available, course competitiveness and my desire to take the course. Results should be released later this week in advance of Round 2 of bidding which happens next week.

Also, I've selected my electives for LBS and have applied to take certain courses. There is a bit more to the process as they want you to have taken Capital Markets before you can select finance courses, but I'll have taken that by the time I get there. Read a few blogs on students going to LBS on exchange from different US schools and their experiences. I must admit, it has shaped my course selection.

Bidding for Electives Begins Today

Bidding for elective courses in second year began today. I'm happy to report that I still have 500 points to bid (the rumor that I lost points for study tours is apparently untrue). However, I only have to take 4 courses this term (maximum and minimum). I'm trying to bundle them together all on Tuesday, Wednesday and Thursday so I can have a four day long weekend every week (and so far it seems possible).

I'm thinking of taking all the core IB courses in one go (so I can concentrate on electives at LBS) including: Corporate Finance, Financial Management, M&A and Options and Derivatives. Considering the sessions (date / time / profs) I want, I will have plenty of points (some courses requiring as few as 0 points).

I just need to confirm my selection with a few friends before placing my bid. Bidding ends one week after the open.

First Year Final Grades Released

Grades from our Q4 classes were released today. While most students felt like this was the toughest batch of courses, I think that the grades panned out as they usually do (some up, some down, class wide aggregate average change of zero). I myself had flat grades (no significant change from previous).