Arnold Kling  

Grist for Bryan

My Consumer Surplus Story... A Macro Play in Three Acts...

Lauren Rivera, an assistant professor at Northwestern's Kellogg School, has written a paper on the way that elite employers screen resumes (no ungated version found). Her claim is that top law firms and investment banks select for prestige in academic background, not for content. Various bloggers have commented.

Steven Hsu writes,

It is odd that the soft firms, which market themselves to clients as being super-smart repositories of brainpower (of course this is largely a fiction; see point 3 above), would rely so heavily on university admissions committees. They effectively outsource a big chunk of due diligence on their most important investment (human capital) to a group of people whose judgement they somehow trust, but perhaps without detailed understanding. When I was on the faculty at Yale I knew people in admissions and it's not clear to me that they were the best able to spot potential in 18 year olds. In studies of expert performance admissions people are less good at predicting UG GPA than a simple algorithm. (The "algorithm" is simply a weighted sum of SAT and HS GPA!)

But this doesn't matter if the success of HYPS grads becomes a self-fulfilling prophecy. Once soft elite firms and large parts of the rest of society (in particular, clients) have accepted the idea that elite universities should be trusted to do the filtering, these schools will automatically produce large numbers of successful alumni -- the imprimatur itself has value. The outsourcing of human capital filtering is more dangerous for hard elite firms, with their more objective criteria: if they find that Yale grads aren't actually any good at pricing derivatives, writing code or designing chips, then they'll have to adopt a different filter.

Steve Sailer asks,

Why don't firms that hire 22-year-olds ask college seniors to take the GMAT or GRE or LSAT and have those scores sent to them?

I think of this sort of employment screening as a form of cultural prejudice, somewhat akin to racism. The only way that racism can pay off economically for a firm is if the other firms that it deals with are also racists, so that it gets more revenue or lower costs in return for conforming to shared prejudices. The harder it is to measure quality objectively, the more chance there is for a racist equilibrium to assert itself. For example, if it hard to measure quality of research objectively in the humanities or the social sciences, then you can develop a community of prestigious degrees and journals that is based entirely on a set of shared prejudices. Similarly, you could get a racist equilibrium in occupations where shared prejudice causes value to be more correlated with irrelevant characteristics than with objectively measurable skills.

I call this post "Grist for Bryan" because he is a strong proponent of the signaling model of educational credentials. I am inclined to doubt that the world is quite so perverse.

Comments and Sharing

COMMENTS (20 to date)
Eric Falkenstein writes:

You will have a legal problem if you use a quantitative test explicitly because the law states burden is on you to prove they work--impossible as a practical matter for most firms--whereas schools that act as a noisy estimate of GREs etc, so you get smart kids and no grist for the legal mill.

Mr. Econotarian writes:

I'd argue that selection of graduates from top universities is more likely a cultural qualification issue than an academic qualification issue.

I'm sure you can find a graduate from the University of Maryland and a graduate from Harvard that measure up to each other in terms of academics and intelligence (although perhaps only a handful of Maryland graduates :)

However if you lived at Harvard for four years, you have been partying with people whose family own summer houses in the Hamptons (many of which will be future business opportunities). At the University of Maryland, you are just partying with the Hoi Polloi, many of which are Criminal Justice majors, even if you are an engineer or physics major yourself.

If I had to hire a software engineer, I don't really care where he or she went if they are capable. If I am going to hire someone who needs to either work in business with clients of the culture of "the rich", or at least needs to work alongside them, then the top Universities are more attractive.

Stephen Smith writes:

I believe what Eric Falkenstein is referencing is this paper by Richard Vedder:

volatility bounded writes:

Kling, "I call this post "Grist for Bryan" because he is a strong proponent of the signaling model of educational credentials. I am inclined to doubt that the world is quite so perverse."

Kling Hsu has it right at the junior level. At those levels, there are stacks, and stacks of applicants and no way to compare them or screen for a work ethic, IQ, etc except to screen based on schools attended and grades received.

At more senior levels, laterals are often hired who have proven worth through demonstrated performance in the relevant field. But college and grad students by definition do not have directly relevant experience to prove themselves, so they are screened using this method. And given that junior level work at elite firms is mostly geared around willingness to grind out long hours, whenever you are told to do it, and willingness to follow instructions, and prestige to impress clients, one can't dismiss the screening as irrational.

There are firms in some areas that successfully compete with the elite firms by hiring people with far worse academic credentials, and then rigorously firing tons of people at the junior levels. However, the business model at elite firms doesn't allow this, given the focus by clients on prestige and given the fact that there is a very low tolerance for errors by clients or anyone else.

steve hsu writes:

In case you don't have access to Rivera's paper, I put some excerpts in this post: Credentialism and elite employment.

The excerpts include quotes from people Rivera interviewed, so you can hear the opinions from the horses' mouths. If you have experience with elite law, consulting and i-banking firms, none of this is surprising.

What Rivera establishes is that the *main* signal used by these "soft elite firms" is school prestige. (I differentiate between "soft" and "hard" depending on whether the quality of the output of the firm is easy to measure. Technology companies like GOOG/MSFT are "hard" elite firms.)

I don't claim that the reliance on prestige is entirely signaling. After all, the top universities in the US do get a large fraction of the most talented students. See Elite universities and human capital mongering.

Miguel Madeira writes:

"if they find that Yale grads aren't actually any good at pricing derivatives, writing code or designing chips,"

I am not much sure about the "pricing derivatives" bit - these type of prices have much of self-fulfilling prophecy, then a set of shared prejudices could also mantain himself during some time.

eccdogg writes:

Really depends on what type of derivatives you are talking about.

If you are talking MBS that are not going to be hedged and put in a drawer for the next 30 years then yes their is some self fulfilling prophesy.

But if you are talking about Equity/Commodity/Currency/Fixed Income etc derivatives that will settle in the next year or 2 and that will be hedged aggressively then there is a pretty clear feedback signal in the P&L. You either made money or didn't.

jeff writes:

I'm in software development and I see the occasional job listing in NYC for a software developer at an investment or trading house for which "Ivy League" is preferred.

This selecting by credentials may be dubious for law and banking, but it's spectacularly moronic for software developers, where just about all the best people I know graduated from dubious colleges, obscure international schools, or are dropouts.

When I see a place asking for "Ivy League" for software guys, I assume their software stinks.

Jim Ancona writes:


As an Ivy League graduate software engineer, I agree completely.


Lewis writes:

This might say more about what customers look for. It must be really, really hard for customers to measure quality, as customers don't really know much about what would count as a good track record for a lawyer. So, customers like law firms with lots of lawyers from elite schools, because everyone knows about elite schools.

V writes:

Arnold, I'm surprised you didn't file this under suits vs. geeks.

sourcreamus writes:

It seems that what is important in these jobs is no so much being smart but seeming smart to clients. People who attend elite universities are probably very good at appearing smart.

John Thacker writes:

Yes, I too immediately thought of Griggs v. Duke Power when I saw that quote. Companies *can't* make anyone take tests, they can only outsource it to educational institutions.

Foobarista writes:

Yup, in computer science, with the exception of Stanford, none of their "top five" made the USNews "top ten".

One thing that was odd - why did the writer feel it important to note the ethnicity and sex of the interviewees?

As for recruiting from "top schools", finance isn't alone. Big Silicon Valley companies recruit new graduates similarly, although the schools are different, and some of them (Cisco, Intel) do use the "easy to hire, quick to fire" approach.

Patrick C writes:

As someone who used to both work and recruit for a top-tier consulting firm, there is simple math involved:
1. it costs a lot to sift through thousands of resumes, so you have to limit the scope somehow
2. yeah, there are smart people at U of Whatever (insert state school), but the raw number of top folks at U of Whatever is a fraction of most Ivy League schools
3. the entire professional services model at most firms is built around beating the heck out of junior people and churning all but those who "fit the mold" for partnership.
4. which means that you want to select people who are keen to "play the game" and work hard on (often) nonsensical objectives. fortunately, Ivy League folks are perfect for this.

(note: I went to a state school but most of my colleagues were Ivy League grads. many were very bright, and many were quite slow, almost shockingly. many "got it" immediately, and many will never "get it.")

celestus writes:

I hope she actually looked at the outcome of hiring decisions, rather than just interviewing a bunch of people about their ideal hire? Furthermore, grades are given as having only slightly less importance than school prestige.

Also, some employers do ask for SAT scores and it is widely known among students that even if they do not ask for it, you should put your scores on your resume if they were good.

There's also Krueger and Dale, I suppose, though that data is very old.

One way to demonstrate discrimination in favor of Ivy League grads would be to show that they make up a higher % of the government/non-profit workforce than of the private workforce a la Becker...

jc writes:

Fwiw, management professors I know who study employee selection practices echo @Eric Falkenstein.

(I also know folks who are under pressure to develop tests that measure GMA while delivering results that will not make employers vulnerable to discrimination lawsuits. Morale doesn't seem to be terribly high, as they almost seem to resent any bit of progress they make towards their goal, feeling as though the objective, scientific island they work on has been annexed by the political realm.)

ChrisA writes:

In a highly competitive situation it can be rational for companies to recruit from elite universities, even if the universities admin process is poor. Think of it as a test for a student which is to figure out and score high on a University Admission Process. A farsighted thoughtful person will study up on the process and use whatever advantage (networks etc) to get a good score, someone who can game the admin process gives a very good signal to go with academic qualification. The more students applying the better the signal. Its never going to be 100% effective, but certainly better than taking a random sample of non-elite students.

mark writes:

As someone at what I think of as an elite firm and who has hired hundreds of such professionals and looked at thousands of resumes, I am skeptcial about the paper. I would like to see specifically all the firms she interviewed for those quotes. Is it a valid sample? I am skeptical. It does not resemble anything I have seen or done and very few peer firms have either as we all hire from the same schools and pools. Maybe the consulting firms have that attitude, but it does not match anything I see in finance or law.

Steve Sailer writes:

Judging by the colleges attended by Fortune 500 CEOs (e.g., the U. of Wisconsin does as well as Harvard), there is a huge amount of talent out there that's not in Harvard, Yale, Princeton, or Stanford. So, why (besides Griggs) won't employers look at test scores at age 21 rather than indirectly look at test scores at age 17 by prestige of college attended?

Why won't ETS and the other testing services allow you to send official copies of your scores on the GMAT, LSAT, GRE, MCAT, etc. to employers?

I took the GMAT during my senior year in college, when I was debating whether to go to B-School or to get a job. I got a good score, so I had the GMAT people send an official (non-forgeable) copy to the B-Schools I was applying to. I didn't see anyway to have an official copy of my score sent to the employers I was also applying to, so I photocopied my score report and stapled it to my resume. But I could have forged the photocopy, so I don't know how seriously any employer would take it.

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