When the EU formed in 1998, I was the crazy guy in the corner of the pub ranting to all my friends that it would one day come a cropper. Since there seems to be little appetite in Europe to fully integrate and become a United States of Europe, the risk was high that the EU would inevitably fracture that a member state would one day have to leave. Now former Fed Chairman Paul Volcker seems to agree. As the EU charter stands, it’s unclear how this would occur: the charter has pages upon pages about what it takes to get in, but not a single word about what it takes to get out.
So, under what set of circumstances would a member withdraw? One likely culprit would be a localized recession like the one happening in Greece right now.

When a recession hits a localized area in America such as, say, Ohio, it might be because the local economy has a dearth of large industries, and those that it does have are suffering. Or perhaps local officials have made a series of poor economic policy choices over a number of years. Often, there’s also a larger downturn affecting the entire country or region. In the case of Greece, all of the above is true.

The EU, against its charter, is bailing Greece out. Much has been written about the similarities between the current financial meltdown in Greece and the one that rocked the U.S. at the end of the 2008. America certainly shares some of Greece’s weaknesses: bitter partisanship, overly influential interest groups, and a spoiled populace that chronically spends beyond its means.
Nevertheless, the respective crises in America and Greece differ significantly in ways fundamental to the differences between the U.S. and the EU. When the EU was formed and the Euro was adopted, Euro-cheerleaders applauded the efficiency of a unified market for goods and services (including labor). But economic size confers both plusses and minuses. While there was much back-slapping over the desirable effects of European Union, there was little thought given to the negative consequences.

Under ordinary circumstances, largeness leads to more efficient interstate commerce. It can help make labor markets and capital markets more efficient, so that national resources (workers, federal dollars, etc.) naturally fill vacuums. But smallness has advantages as well. It gives a region control over its currency and interest rates– control that it would lose as part of a larger union.

But the EU has never been anything close to a fully integrated union. And, in practice, the EU confers only some of the benefits of largeness, while taking away all of the benefits of smallness.

In general, fluid labor markets are one of the greatest advantages to largeness and one of the most important defenses against localized recession. This is the case in America: if there’s a localized recession in one place, people leave the region and go where the jobs are. Most Americans don’t expect to settle in the town in which they were raised. Sure, there are regional differences, but most Americans can live with trading Dunkin Donuts for Peet’s Coffee, if it means they have a job. Europeans generally don’t think this way. There is no central language or culture in Europe. Most Greeks would be astonished if you suggested they move to Dusseldorf.

Capital markets are also generally more efficient in the U.S; money moves around more easily and efficiently, and better fills vacuums where it’s needed. So if the rustbelt suffers a downturn, capital might move in because it’s a good place to build new manufacturing plants, given all the high-skill, unemployed labor.

Large economies can also prop up underperforming regions with direct government investment. The U.S. government often helps out individual states when they’re struggling. In Europe, doing so is illegal; it wouldn’t have happened with Greece except for this extraordinary crisis, and it may never happen again.

So the EU lacks some crucial benefits of largeness (at least relative to America). This wouldn’t be so bad if the member countries retained the advantages of smallness but the EU’s formation took most of these benefits away too.

Depending on their need, small countries typically have several very powerful tools to affect their economies. They can devalue their currency to make exports more competitive. They can print more money (increase the money supply) which will encourage inflation; that can be helpful (if risky) because increasing inflation reduces a country’s debts and payables both foreign (government bonds) and domestic (salaries and pensions). Countries can also increase interest rates to attract more foreign investment. Or they can lower interest rates to stimulate manufacturing and business expansion within their borders.

But small countries in the EU can do none of these things, since they control neither their interest rates nor their currency.

Greece is a telling example. When the Greeks joined the EU, they promised to hold their deficit at or below 3% of GDP. It’s currently around 14%. Because Greece operates at a deficit, each year it has to borrow money to pay the difference. It’s like Europe has its own 30-something child who lives in the basement, doesn’t really work, and keeps asking for money. The markets think Greece might default. (It very likely will.) So the markets, quite reasonably, are asking for higher fees to lend Greece money, making it even more difficult for Greece to pay its bills.

Why can’t Greece just stop spending? It could, but its debts are so great that it wouldn’t be enough. The Greeks could try to grow their way out of debt, as America did in the 90s. But America is a much more diverse, vibrant, and efficient economy. Greece is an economy whose three largest industries are tourism, shipping, and– olive oil?

If Greece controlled its currency, it could start pumping money into the system increasing inflation and devaluing its debt. This would effectively reduce the salaries and pensions of all Greek workers, including government workers (further improving the deficit) and private sector workers (making Greek businesses temporarily more profitable, and hence improving growth for a couple of years). But Greece doesn’t control their currency.

So instead, the rest of Europe is bailing Greece out. They are doing so because they are worried that their own banks own most of that Greek debt. They are also worried about the kind of domino effect we saw in the U.S. with Bear Stearns and then Lehman Brothers. In a crisis, markets always look to see who is the next worst off and proactively begin shying away from them.

But why would Germans, who work harder, save more, and retire later, subsidize lazy irresponsible Greeks? Eighty-eight percent of the German people opposed the bailout plan, and Angela Merkel’s government was certain to lose seats in their upcoming election if they supported the bailout. The German people, as we are finding out, aren’t quite the suckers we thought they were. Merkela’s government supported it nonetheless, and they paid a heavy price at the polls.

Since World War II, the Germans have been devoted to the agenda of fiscal prudence and European stability. Those twin goals had been conjoined; suddenly they are at odds. Apparently, the German governing class had just enough postwar guilt left for one last great effort on behalf of Europe. There won’t be another. Europe will have to choose between full integration and inevitable fracture.

Both cities attract the very best and brightest. But NYC has 20 times more.

The best programmers and internet entrepreneurs are in the Bay Area. Don’t kid yourself about that, not even for a second. To paraphrase Reservoir Dogs, NYers who even dream we’re in the same league ought to wake up and apologize. Looking for a young SEO or SEM wiz? Want to have a deep discussion about network effects vs. viral effects? Go west, young entrepreneur. The practical experience and intellectual capital in the Bay Area is light years beyond that of NYC — or anywhere else. Even East Coast VCs — never mind entrepreneurs — barely know what network effects are. They routinely confuse them with viral effects and/or switching costs, or they confuse viral effects with word of mouth. It’s pitiful. It’s only critical to your success, people; no reason to master the fundamentals…

What NYC does attract, year in and year out, is the very best general talent from around the world. The absolute smartest, neurons-just-fire-faster, can-bend-spoons-with-their-mind talent. What MBA types call “athletes.” The Bay Area gets the best of the web. NYC gets the best of everything else. And NYC gets 10-20 times more.

And this is where the Bay Area shouldn’t kid itself: we’re smarter than you. Our geniuses are just as smart or smarter, and we have a lot more of them. Not to mention that we also have WAY more domain expertise — more on that later.

The entire Bay Area is tiny compared to NY, in terms of both population and industry. NY’s size helps enormously for sourcing any job not involving coding. But it even helps somewhat WRT coders. Knewton has had great success taking some of that talent — US Math Olympic team jocks, philosophy types with a masters degree in logic, and award-winning young writing talent from (LOL) Stanford — and turning them into coders and content specialists.

In years past, those best-and-brightest all came to NY and joined law firms, the fashion world, or the financial industry. The talent’s still coming. But those industries have all shrunk and/or are becoming less alluring. The big beneficiary is the start-up scene. Sure, the pay sucks. But you could get rich, and the lifestyle is awesome–as is doing something that actually matters.

East Coast Funders

Historically, NYC hasn’t been known for the quality of its venture capital. That may be changing. Bessemer, First Round Capital, and Union Square Ventures are all killing right now. FirstMark is an up-and-coming fund with a great current portfolio, including the en fuego SecondMarket. Facebook-backer Accel is also active, investing in Etsy and Varonis. (Knewton is backed by First Round, Accel, and Bessemer.) Matrix invested in TheLadders, and just moved a partner to NY. Other NYC companies that make internet geeks drool all over their iPads: SeamlessWeb, Foursquare, HuffPost, Gilt, Meetup, Tumblr…

The Valley Laughs

Every time one of these stories comes out, I get emails all day long from friends in the Valley making fun of what they see as NYC’s sad little inferiority complex. I mean — did you see Silicon Alley Insider’s 20 Hot New York City Startups? Half the picks are solid companies that Valley investors are mildly interested in. But the other half elicit only gloating chuckles from my B-school pals who gleefully send me the link, along with some variant upon: “If NYC is so great, how come _______ is on this list?”

Seriously people, we’ve got to stop writing these stories. They’re making us look silly. Or, if you are going to write them, at least include Knewton! Sheesh!

Domain Expertise

This is probably the biggest difference between the Bay Area and NY, and the most auspicious sign of NYC’s continued ascension. It’s also a key point missing from the vapid NYC cheerleading we’ve been reading recently. So here it is: NYC has vastly more domain expertise in every non-tech industry than does the Bay Area.

For those starting a web company today, the relative value of industry expertise vs. Internet savvy is much higher than it was ten years ago. Jeff Bezos was one of those best and brightest who came to NY to work in finance. He didn’t need to know anything about retail bookselling to start Amazon. If Amazon were started today, though, it would be by some kid from Barnes & Noble, and it would be based in NY — for the same reason that Gilt, TheLadders, Gerson Lehrman Group, SeamlessWeb and HuffPost all started here.

The gap in Internet expertise has narrowed: every major corporation in the country has dev teams, SEO/SEM specialists, and blogging/social networking gurus. It’s not like hanging out on University Avenue in Palo Alto, but you can find acceptable web talent in big NYC corporations. Meanwhile, the gap in domain expertise is still vast–creating a relative advantage for NY entrepreneurs.

So if you’re at some random big business and you see a great opportunity that your company is too big/dumb/slow to pursue, or won’t pursue due to an Innovator’s Dilemma dynamic, chances are you’re in NYC. You can find web talent within your company that you couldn’t ten years ago. You may even be one of those people yourself. And you can now raise very high-quality money in NY, which you couldn’t do ten years ago.

In the end, it is this structural advantage that’s inexorably helping to create more hot start-ups in NY. And that underlying structure bodes well for NYC’s continued gradual ascension.

Here’s the full story:

The test prep industry began in Stanley Kaplan’s Brooklyn basement just after World War II. The son of Jewish immigrants, Stanley believed standardized tests were some kind of elitist plot to keep minorities out of the Ivy Leagues. His philosophy was that anybody could improve at standardized tests. The testing industry and larger education establishment loudly proclaimed that idea to be wrong, foolish, and practically immoral. But Stanley, standing alone for a long time, was proven right.

In 1984, The Stanley H. Kaplan Company was bought by the Washington Post/Newsweek Company. The New York Times laughed. Today Kaplan, if it were a standalone company, would be bigger than the rest of The Post and The Times combined.

I joined Kaplan in 1991. I had just graduated from college and moved to San Francisco without a job. It was the middle of a pretty bad recession, but the good news was that I had majored in Philosophy. Turns out that made me unemployable. To try to improve my writing skills, and because I had nothing else to do, I wrote a book. Kind of a techno-thriller in the style of Michael Crichton, only without characters you could identify with or a plot you could comprehend. It wasn’t published.

I also began taking standardized tests for fun — in the morning with a cup of coffee, the way other people do crosswords. I found a hidden structure to standardized tests that makes them a lot easier.

A friend said “You should teach for Stanley Kaplan.” So I did.

At the time, Kaplan’s product consisted of 36 hours of live instruction in nine four-hour classes. The curriculum was heavy on content and light on strategy. Or anything fun. By hour four, the class resembled not so much a roomful of go-getters as it did a clinic for narcolepsy. The course also featured a lot of practice material you could only access at the local Kaplan center. Audiotaped explanations were provided via bulky old tape players from kindergarten. Students from other parts of the country found the heavy Brooklyn accents incomprehensible. It was like having Luca Brasi from The Godfather explain algebraic equations to you. But Kaplan management was very proud of the tapes. Without irony they referred to them as “technology.”

Students weren’t allowed to keep their lesson books. At the end of each class, they were required to hand that day’s booklet back in. This drove students insane. But Kaplan management believed that students only took the course because of “the secrets” in the lesson booklets — yes, arcana like “arithmetic” and “triangles.” By forbidding students from keeping content they’d already paid for, Kaplan was saying in effect, “We’re more worried about our students stealing our intellectual property than about improving their scores.” Which, of course, giving them the materials would tend to do.

While Kaplan was sharing this revolutionary customer service philosophy with the world, a small company was being started by Princeton grads John Katzman and Adam Robinson. The Princeton Review (“TPR”) electrified the test prep world with its “Joe Bloggs” system, based on how a perfectly average shmoe would answer any given question. Easy questions had answers that looked right to Joe Bloggs; difficult questions had answers that looked wrong. Joe Bloggs was fun to teach and to learn. But it was fixable; the test-makers could change their tests to kill Joe Bloggs. And, since John Katzman loved nothing so much as mocking the tests publicly, that’s precisely what they did. RIP Joe Bloggs.

The smartest thing Katzman did was create test prep guides for bookstores. Kaplan, with their General Jack D. Ripper-esque obsession with secrecy, had of course never published a bookstore product. So TPR had the shelves all to themselves; Katzman used bookstores as a marketing channel to spread the TPR brand. Instead of bleeding cash to build the TPR brand, Katzman found a way to get paid to do it. TPR rose quickly, and Kaplan, with their audio tapes and lesson book lockdown, quickly lost market leadership in SAT prep.

Fortunately for Kaplan, The Post Co’s Don Graham began to make changes, replacing the ancien regime with a team of Harvard Business School grads. Kaplan’s new CEO, Greg Rorke, had previously turned around Danskin. Now he got Kaplan focused on technology for the first time. He brought in a lot of charm and energy. He also brought in Jonathan Grayer, who would eventually replace him, from Newsweek‘s ad division. Stanley was still around, but only in an avuncular, non-executive kind of way. Eventually he lost the corner office.

The new Kaplan, minus Stanley, faced a challenge other than new competition: computerized testing. The Educational Testing Service (ETS), long-time publisher of the GRE, SAT, and GMAT, was moving the GRE and GMAT to computer format. Since computer tests are given five days a week rather than five times a year, this would inevitably disrupt Kaplan’s entire sales infrastructure and field operations. It would presumably also require us to develop technology more sophisticated than audiotapes.

I was made GRE Product Director. My marching orders were to “figure out this computer thing,” and quickly make product for a brand new GRE question type called “Pattern ID”–a bewildering cocktail of math and logic that befuddled everyone who saw it. Most people couldn’t even understand the directions. But it could be batch-created by computers in vast quantities. Since computerized testing requires lots of questions in order to be secure, Pattern ID was a godsend for ETS.

Almost accidentally, I created a Pattern ID strategy that was so powerful that students could get all the questions right without doing any work. I was conflicted. If I kept quiet and let ETS administer Pattern ID on scored exams, ETS would eventually be compelled to cancel every score, affecting hundreds of thousands of students. I had delusions of making it into Time magazine. But doing so would force all those students to retake the GRE. Instead, I gave ETS a heads-up. They wound up throwing away hundreds of thousands of test booklets and tried to forget about Pattern ID. One of them offered me a job.

ETS admitted to a major periodical, and by that I mean the Louisiana State University Daily Reveille, that I “broke the code and published it, so we are removing the questions from the test.” This marked the only time in the history of standardized testing that a major test-maker admitted they removed questions because they’d been decrypted by a coaching strategy. Kaplan put that quote on every direct mail postcard they sent out for something like ten years. Even nursing students in the Philippines got postcards about it.

ETS’s problems with Pattern ID did not slow their drive to administer tests on computer. They launched the computerized GRE in 1994, with plans for the GMAT to follow soon. Pattern ID had taught me that the more tests are based on programmatic rules, the easier it is to break open their underlying structure. I sent researchers to take the new test and immediately discovered two new Pattern ID-sized fiascoes.

First, I reverse-engineered the scoring algorithm. I found multiple weaknesses and began coaching students to skip the last questions in each section and spend the extra time on the first questions. This produced score gains of up to 100 points per section. ETS later admitted as much to U.S. News and started recommending it themselves to level the playing field. That was another first: the test-maker giving advice to students on how to game their own system! Eventually they gave up and rebuilt the algorithm to make this approach less effective.

Second, I reverse-compiled the question pool. The way it works is: computerized tests require the same pool of questions to be used for weeks at a time. So question pools have to be enormous to prevent cheating. But my researchers were all seeing a dozen or more of the same questions–almost mathematically impossible if the pool is large enough. Since ETS had testified under oath before the New York State Senate that the pool was indeed large enough, this had the potential to be perhaps the most fascinating statistical anomaly of all time.

The question pool we handed over to our accounting firm, Price Waterhouse. Then we contacted ETS and said something along the lines of, “Umm… wow, this is a little awkward, but we have your test.” At first, ETS issued a press release thanking us. Two weeks later they sued us on the basis of copyright infringement and named me personally as a defendant. Don Graham, in a visit thereafter to Kaplan headquarters, placed his hand on my shoulder and said, “You know, you’re the youngest person ever to get the Washington Post/Newsweek Company sued!” Lucky for me, he seemed more bemused than anything else.

Deans and docents around the country had been calling ETS asking if the GRE could be trusted–not questions you want to hear asked about your eight-figure investment in computerized testing. So they sued Kaplan and told everyone else not to worry, that only a fiendish mastermind could compromise their test’s security. In reality, though, pretty much any buffoon at your college fraternity could have compromised that test.

The parties agreed to a token settlement. Later on it emerged that ETS had for some time been referring to me as “the antichrist.” Needless to say, we didn’t put that on any postcards.

Jonathan Grayer, now CEO, tabbed me with leading a Kaplan-wide initiative called “Project Footprint,” the stated purpose of which was to build everything from scratch the way it ought to be built. We streamlined the course to 8 three-hour classes, employing a “Preview-Classroom-Review” architecture I took from a GRE course I’d previously created. We replaced the audiotapes with CDs. And, of course, we let students keep their materials.

I left Kaplan shortly thereafter to go to Harvard Business School. My timing was impeccable. Kaplan went on a tear that continues unabated today, growing from around $70 million in annual revenue to around $2.5 billion.

Kaplan’s new leaders weren’t education people. Some of them referred to our products as “widgets,” admitting they would be just as happy selling Charmin or dreaming up new marketing campaigns for the Frito Bandito. It often seemed to me that they considered test prep just about the most stupid little industry ever devised by man. And maybe it is, though they have done a marvelous job of making it a bigger industry. They’ve accomplished this by being obsessed with numbers, calling area managers every day to get the latest. Unfortunately, the numbers they’re obsessed with are daily revenues, not student score increases.

Today’s Kaplan course is not very different from the one I built in Project Footprint: still 20-odd hours, with the same Preview-Classroom-Review architecture. As far as I can tell, Kaplan’s biggest innovation in the last decade has been to realize that many people aren’t ultimately price sensitive when it comes to determining their entire future. When I first started at Kaplan, the price of a GMAT course was $590. Today it’s $1,490.

What’s now clear is that the traditional business model of local “Strip Mall Test Prep” is hopelessly archaic. Nearly all the money you spend on old-school test prep is wasted on local teachers, centers, center staff, and marketing. And all the paper, printing, shipping, and commuting requirements are about as eco-friendly as a coal-fired thermometer factory. These things used to be necessary for product delivery, but never added to product quality. Now they’re just the waste byproducts of a bloated, outdated infrastructure, propped up by your hard-earned dollars. The future of test prep is online, and moving there quickly. Instead of having a mediocre teacher, you’ll get the very best teachers and test experts in the country, any time you want, for as much time as you need, for a lot less money. I started Knewton.com to do exactly that.

People always ask me whether I think standardized tests actually measure anything. I used to give nerdy statistical answers about scoring validity and concordance tables. Eventually I realized that what these people want to hear is: “Standardized tests combine the diagnostic efficiency of a banana republic health care system with the personal touch of the airport immigration line.” It helps to throw in a reference to the Nazis for good measure.

The reality is that standardized tests are very effective predictors of academic success in college or graduate school. That’s a fact of statistics, whether we like it or not. It’s also just an average, and you may be an exception one way or the other. That’s why standardized tests are just part of the application process, and are never (or, should never be) the most important part.

Another pop psychology protest is that standardized tests are ipso facto biased against minorities since African Americans and Hispanics on average underperform the mean. This argument is about as logical as divorcing your spouse upon reading that most billionaires are single. Other minority groups perform at or above the mean, so the issue isn’t ethnic identity. And it isn’t the tests; every question is now statistically vetted to eliminate any cultural bias. The failure is in society itself.

Yet a growing number of colleges say standardized tests don’t measure anything and are making the SAT voluntary. Some of these schools use intellectually dishonest arguments like: “high school grades are a better predictor of college performance.” That’s true, but high school grades combined with SAT scores are a better predictor still. So why not use them? After all, getting more information can’t possibly hurt–can it?

My suspicion is that schools making the SAT voluntary are doing so for affirmative action purposes. In 2003, the Supreme Court significantly narrowed the allowable use of affirmative action in university admissions. Shortly thereafter, admissions rates across the country declined for Hispanics and African Americans. Since these groups historically underperform the mean, SAT scores tend to be a mildly deflationary force on their overall admissions rates. The ivory tower solution? Drop the test so that affirmative action admits are easier to justify. And, wherever possible, shoot the messenger. It’s come full circle: The folks who marginalized good ol’ Stanley Kaplan, who once demanded standardized tests in order to keep minorities out, now attack the tests so they can let more minority candidates in.

Starting this week, Jose is a featured blogger on The Huffington Post. Here’s his first piece on the Google-China showdown.

–

Google is playing hardball. After last week’s ultimatum, the search giant appears to have left itself no way out: either China allows Google to operate uncensored or Google leaves China. Why would Google posture like that? Surely it’s not serious about leaving China. What would be the point? Why would a company like Google make feeble idealistic gestures that will hurt its business and ultimately help no one else?

There must be a missing fact that makes this puzzle come together. My guess is that Google can prove that the Chinese government was behind the recent cyber-attack. There probably isn’t any real proof yet, but all Google needs is enough proof to sentence China in the court of public opinion.

Google’s real threat to China is not that it will leave the country. It’s that it will embarrass China and damage its national reputation as a place to do business. On the other hand, if Google can convince China to end or reduce the censorship restrictions on its search engine, then Google will have a significant competitive advantage over market leader Baidu.

The way I figure it, Google believes it can pressure to China to loosen, though not lift, restrictions on Google’s searches while keeping them firm on Baidu’s presumably China can be counted on to do the minimum loosening possible. Such asymmetric loosening would be a significant competitive advantage for Google in the world’s biggest Internet market (and one where Google is lagging behind Baidu by a margin of 2:1).

This is the only sense I can make of Google’s actions. Of course, perhaps they’re just being stupid…

You may have heard that some business schools* have started accepting GRE scores in place of GMAT scores. And you may be thinking: “Awesome! I hear the GRE is easier. I’m taking that!”

After all—there’s no Data Sufficiency on the GRE. Sounds great, right?

The problem is: There’s no Data Sufficiency on the GRE.

The GMAT has been designed and perfected for business school students. GMAT questions mirror the tasks you will perform every day in business school. Reading Comprehension—because you’ll be reading 50 -100 pages in case studies every day. And Data Sufficiency—because you’ll be skimming each case’s exhibits and financials to determine which numbers are key to cracking the case and which are irrelevant. What about Critical Reasoning? Well, every day in class you will comment on other students’ arguments. And they will comment on yours, sometimes in pretty snarky ways. So you need some facility in arguments, if only to protect yourself from that loudmouth ex-banker in the Skydeck.

In fact, the GMAT is a great test. By that I don’t mean that it will bring peace to the world, or spiritual enlightenment, or that a good time will be had by all. I mean it’s extremely well-constructed, with very high scoring consistency. In short, the GMAT does an excellent job of testing the skills you need to excel in business school.

In contrast, the GRE General Test is, well, general. It is designed to provide a sense of the fitness of a student for graduate-level work, whether one is interested in pursuing a PhD in English or a Masters in Psych. But the aptitudes needed to succeed in one discipline are very different from those of other disciplines, and no single test can measure them all well. Success in business, and success in business school, requires very specific skills that the GRE measures poorly, and the GMAT measures very well.

Furthermore, the GRE has been a rather troubled test. (ETS might claim that I’m the one who caused their troubles; in fact, I merely shed light on them.) In the 1990s, I developed a strategy for one question type called Pattern Identification that was so devastating that ETS had to discard hundreds of thousands of printed test booklets, admitting that I “broke the code, so we are removing the questions from the test.” Later on, I reverse-engineered the security protocols and scoring algorithm of the early GRE computerized test, forcing them to pull the exam for months to fix problems I uncovered. They sued us, and took to calling me the “antichrist.” (Umm, do I at least get Connie Nielsen with that?) Later still, they had serious scoring problems with the GRE analytical section, and consequently did away with that section entirely.

So then why do any business schools accept the GRE? Ok, well for one thing the GRE is slowly but surely getting better, and it’s about to be significantly revised so it will probably improve still further. But mostly, it’s about access, especially internationally. The GMAT isn’t available in as many locations, especially overseas. So business schools figure, “Hey, if we accept the GRE, we’ll find some great candidates who might not have been able to apply to business school, or who might add an MBA application or two along with their Masters applications.”

Bottom line: if you can take the GMAT, you should. The GMAT tests skills specific to business school. While admissions officers at schools accepting the GRE will accept a GRE score in lieu of a GMAT score, they doesn’t mean that they’ll will trust GRE scores.  And if you give them a GRE score when it’s clear you could just as easily have taken the GMAT, it could hurt your application.

Besides, Data Sufficiency is fun! Well, here at Knewton we think it’s fun. (Though we also think puns about transfinite cardinality** are hilarious.) More importantly for you, Data Sufficiency is equally hard for everybody. It is also highly coachable, and Knewton’s Test Experts have developed the most powerful Data Sufficiency strategies there are. Stay tuned and maybe I’ll blog about them…

—-
*MBA programs accepting GRE scores include Harvard, MIT, NYU, Stanford, Virginia, Yale, U Penn, and Berkeley.

**One of our math guys’ last name is Naul. And his middle name is Alan. Like I said—hilarious!

I was speaking to someone in India in the test prep industry about the GMAT and that person seemed very confident that the database of questions for the GMAT test in India is different from the database of questions in the US and Canada (the pool of questions in India being harder). Have you heard anything like this?

And here is how I responded:

You’ve touched upon some topics that interest me a great deal, so let me give you a longer answer.

The test-makers have always used multiple question pools at any one time, even within the United States. This is done for security reasons, so questions can’t be pirated—something I know quite a lot about. (I once reverse-engineered the computerized test and proved the question pool at the time was much too small, and hence susceptible to cheating. The test-makers pulled the exam for months and implemented the changes I and others recommended—adding more questions, rotating pools, etc.) Question pools rotate every few months. Pools used internationally either just came from and/or will soon head back to North America. These pools are all (almost) perfectly calibrated with each other so that your score on one continent will be—within the margin of error—your score on another.

My suspicion is that you’ve heard some kind of urban myth that has its roots in:

• paranoia that U.S. schools are too full of Indians and want to restrict their numbers
• chauvinism that Indians are smarter/better at math

There is nothing true about the assertion you’ve heard. If anything, the opposite is closer to the truth. One of the early consequences of standardized tests in the U.S. is that they led to greater acceptance of candidates who weren’t Anglo-Saxon white males. In the early days, that meant more Jewish Americans. Then it began to mean more minorities of all kinds, including women as schools became co-ed. Standardized tests have been and continue to be the single most important factor in leveling the playing field for qualified minority candidates. Ironically, this is precisely the reason that some U.S. schools are now drifting away from standardized tests—so they can alter their own standards for acceptance. Due to failings in society itself, and not in the tests, U.S. minorities underperform Caucasians. The hard, unforgiving metrics of standardized tests make it difficult for some schools’ admissions departments to accept as high a percentage of minorities as they would like. So, blaming the messenger, these schools have stopped looking at test scores, so as to give themselves “permission,” in a sense, to accept more candidates they otherwise wouldn’t.

Schools are trying to increase their international exposure, not decrease it. Harvard Business School grads occupy one of the top three positions at something like fifty percent of U.S. Fortune 500 companies. With India and China developing rapidly, HBS and other top schools are eager—even desperate—to mirror that dominance in Indian and Chinese companies. Take my word for it—having gone to HBS and seen their admissions practices firsthand (as well as their legendary habit of nickel and diming their students!)—Harvard Business School is as much or more about Business than it is about School. HBS is, at its core, a factory churning out top business leaders. Those leaders then turn around and give generously to the endowment. That’s the model all B-schools operate under, and it only works if they admit whoever they think will be the most successful.

As for the chauvinism argument: No one race has naturally greater math intuition than another. Some societies or microsocieties are practically better, on average, for cultural/parental/educational reasons. But the GMAT doesn’t measure who knows more math. It measures math intuition and aptitude—which is why the questions are based on arithmetic/algebra/geometry, not on advanced math. It helps to know more math—it makes you more familiar with the content and makes you faster, etc. But it’s not a big advantage.

The GMAT has this just right. Math intuition is very useful to business managers, while deep knowledge of math is not. Math intuition helps inform many of the judgments and decisions made by business leaders. Deep knowledge of math, on the other hand, is a commodity that can be bought inexpensively, since it’s continually rolling off the assembly lines of MIT and other top quant programs every year. This is why the GMAT focuses on intuition and speed, and that’s why we work so hard at Knewton to develop your intuition and speed.

In my experience, people who get caught up in this kind of thinking are damaging themselves. Paranoia and chauvinism don’t generally improve one’s odds of success in business. What does improve your odds of success is the ability to work well with all kinds of people, and favoring diversity of opinion and skills rather than uniformity. And that’s exactly what you’ll learn at every major business school today.