Bryan Caplan  

The Signs of Signaling

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Twitter: Bryan Caplan @bryan_caplan




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Phil writes:

You should send an advanced copy of your book to Scott Alexander

I'd love to read him review it

some of him past work on related questions:

http://slatestarcodex.com/2016/05/19/teachers-much-more-than-you-wanted-to-know/

http://slatestarcodex.com/2014/05/23/ssc-gives-a-graduation-speech/

http://slatestarcodex.com/2014/06/28/book-review-the-two-income-trap/

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I'd bet the crossover between his readers and your readers have good overlap, probably a good way to market your book to a lay audience

dullgeek writes:

I am very anxious to read the book that you will be publishing. I've read some of your blog posts on this subject. I hope that there is a section in the book that gives advice to parents. The oldest of my four sons starts college in August. If I am to be convinced that college certifies skill rather than actually raising it, then what should I be doing to resist participation on this expensive treadmill? If I would like to make sure that my children have opportunities at leading a productive life, I see few alternatives to that very expensive signalling.

What recommendations can you make for parents, if college is merely expensive signalling? I mean it's one thing to say that college isn't what we think it is, but we're still stuck with a society that incentivises pursuing that very expensive signal. Will your book suggest things that can be done to fix the social structures that create these incentives? Is there something that I, as a parent of future college students, can do?

James writes:

Is there any chance this talk will make it onto YouTube?

Phil writes:

@dullgeek

Price it as a signal

Think of it as personal marketing expense

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Different marketing strategies make different degrees of sense for different products/brands

Mark Anderson writes:

Bryan -- I agree with you that the majority of college education is signalling. But some of it truly is human capital. I am curious how much of your own college education you considered to be an addition that benefited your career, beyond signalling. Similarly, if a student had only useful classes, how much time should it take to build the knowledge to be equivalent to PhD in Economics?

Glen Smith writes:

@Mark

Not Bryan but in my field (software engineering), at least for the last decade or so, I'd say, aside from its signal related benefits, there are 0 benefits.

Floccina writes:

@dullgeek If he is not a great student, Bryan has said that economics is the most rewarded easy major. I encouraged my son to try to get the easiest graders for instructors.

Peter Gordon writes:

What are these mobsters thinking?

http://qz.com/728613/wiseguys-mobsters-who-went-to-college-made-more-moolah-than-their-less-educated-mafia-pals/

Phil writes:

@Peter education can still be a signal in the mob

The problem with it as signal now is the ubiquitousness of it, i.e. if everyone has a degree, what does that tell us about each degree holder?

That probably wasn't an issue for college educates mobsters, in fact it probably differentiated from non-violent educated mobsters quite nicely in terms of career advancement opportunities

Hazel Meade writes:

Well, I failed three of Caplans five tests.
I enrolled and paid tuition. I worry about failing the final exam, but not forgetting everything. And I celebrate when the teacher cancels class.

To be fair, I don't think I would be allowed to take the class very long if I didn't enroll and just snuck into class. Eventually someone would figure out I wasn't supposed to be there, especially if it was a small class. Surely people check these things.

Possibly not in my defense, I always liked taking difficult classes for the challenge. Taking hard classes and getting A's anyway is probably a better signal than the easy As. And I don't cheat for the same reason. It's like cheating on a crossword puzzle - there's no fun in it if you cheat. Or like playing video games on the easy setting. It's boring.


Brian writes:

dullgeek,

Relax. Send your kids to college and be confident that it is actually increasing their human capital. As much as Bryan wants to believe that the majority of the non-ability part of productivity is due to signaling, in fact human capital plays a major role. Bryan's theory requires a major market failure on the part of employers, including employers in very competitive markets. This is just not possible. If college education, specifically, provided no value added for productivity, employers would quickly find a way to use simpler and cheaper signaling methods. For example, they would hire top students from top schools when they were still freshmen or sophomores. The fact that they don't shows that colleges are adding to human capital. This conclusion is also supported by the rapid rise in college ROI through the 80s and 90s and continuing into the 21st century. Bryan's model requires a rapidly increasing market failure, which is just not plausible.

Brian writes:

Glen Smith,

Yes, it has always been easy to find self-taught coders who are highly productive. In my field (physics), on the other hand, such folks are very rare. I would have had no hope of being a productive physicist without both an undergraduate and graduate education. So the human capital model is the major contributor to productivity in that field.

Phil writes:

@Brian "Bryan's model requires a rapidly increasing market failure, which is just not plausible."

that's an interesting question, I'm not sure why you're so convinced that that's not plausible

seems like you have a lot of conditions present that make the situation ripe for market failure

lots of government and other regulatory intervention (licensing boards in certain fields that require degrees), lots of information asymmetry (are 18 years olds really in any position to know if they'll excel at any particular career? much less enjoy the lifestyle of working those careers?), lots of people make decisions out of fear (if my kid doesn't go the very best college, he'll be doomed for life!)

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"employers would quickly find a way to use simpler and cheaper signaling methods. For example, they would hire top students from top schools when they were still freshmen or sophomores."

while you don't see a ton of this, you do occasionally see it (silicon valley)

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personally I think college is clearly adding to human capital as well as doing a significant amount of signaling

I think the more interesting question is whether its marginally adding to human capital (and signaling) relative to other ways time and money can be spent

Is paying George Mason $46,926 a year of out of state tuition marginally adding human capital that much more than paying $9,935 a year to attend IUP in-state? (maybe [though I'm pretty skeptical], depends on what you can do to marginally leverage that degree relative to what you can do to marginally leverage an IUP degree [I'd also ask what it means in Baysian terms if you weren't offered any merit scholarship money from George Mason about your ability to leverage a degree from there])

that's actually a pretty difficult calculation for an 18 year old, or their parents, to make w/o some inside information

Brian writes:

Phil,

You said "that's an interesting question, I'm not sure why you're so convinced that that's not plausible...seems like you have a lot of conditions present that make the situation ripe for market failure"

Yes, from that perspective a market failure is possible. The problem with that theory, though, is that employers have ample opportunity and motivation to avoid that market failure. The main signal at the college level comes from GETTING IN a college. At that point, the employer knows how smart you are likely to be, how capable a student, etc. They only need to look at the college's profile to know where you stand. Without the addition of human capital, the next four years are largely wasted for both the student AND the employer. Employers could easily break that market failure by hiring students as freshmen or sophomores. This happens, as you say, in Silicon Valley (since colleges offer little human capital added for coding) or in the NBA. But since it's not happening significantly in any other field, it follows that a market failure is not likely to be the cause of the college ROI. Moreover, a rapidly increasing market failure is even less likely and not at all plausible because that would have given employers even MORE motivation to break the failure. It just hasn't happened.

You also say "Is paying George Mason $46,926 a year of out of state tuition marginally adding human capital that much more than paying $9,935 a year to attend IUP in-state?"

It appears to be. The value-added measure of colleges done by the Economist last year ranks George Mason in the top 4%, with graduates earning $7200 more per year after 10 years compared with the average college ($57,000 vs $50,000 expected based on student body). For Indiana University of Pennsylvania (IUP), the Economist ranks them at 68% with a $1400 value added ($38,000 vs $36,600). This is an advantage of $5800 per year after 10 years and probably approaches $400,000 over the course of a career. That would seem to be worth it, especially for better students who might feel stifled by attending a school with a less capable student body.

Now it's true that this gap may not be entirely due to human capital enhancement. But it's worth noting two things. First, if GMU provides a signaling advantage, it still is worth spending the money. Second, the advantage is not likely to be a signaling issue because there's no evidence of signaling showing up in this data where you might expect it. Specifically, the best signaling schools by far are the Ivies, plus places like Stanford, MIT, Caltech, Chicago, Duke, and Berkeley. Those schools have students all ranked in the top 50 for expected income. If signaling matters for these data, these schools should significantly outperform the less-famous schools with similar student bodies (i.e., top 50). But while the famous group has a +$790 value added, the remaining, less-famous schools are actually better, with +$2200. While I don't attribute any significance to this difference, it's clear that no evidence of signaling is showing up.

Phil writes:

@Brian

fwiw

"It appears to be. The value-added measure of colleges done by the Economist last year ranks George Mason in the top 4%, with graduates earning $7200 more per year after 10 years compared with the average college ($57,000 vs $50,000 expected based on student body). For Indiana University of Pennsylvania (IUP), the Economist ranks them at 68% with a $1400 value added ($38,000 vs $36,600). This is an advantage of $5800 per year after 10 years and probably approaches $400,000 over the course of a career. That would seem to be worth it, especially for better students who might feel stifled by attending a school with a less capable student body."

that's not the right way to think about that, $400,000 is actually a pretty meager return on a[(46,926 - 9,935) x 4 =] $147,964 investment over a 30 year career

https://investor.gov/tools/calculators/compound-interest-calculator

$147,964 compounded over 30 years at 5%, I get $639,491.88

if I contribute $483 dollars a month ($7200/12) for 30 years at 5%, I get $387,167.06

If I didn't have $147,964 in a lump sum available to me and I had to take out loan, that money is compounding in the wrong direction, if it took me 10 years to see my additional $483 a month (and I'm only able to compound for 20 of the 30 years), that math is looking worse, if I'm able to find an investment vehicle better than 5%, the difference between the two strategies is larger

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" But since it's not happening significantly in any other field, it follows that a market failure is not likely to be the cause of the college ROI. Moreover, a rapidly increasing market failure is even less likely and not at all plausible because that would have given employers even MORE motivation to break the failure. It just hasn't happened."

I think that's generally a good point, though we should also consider that going to college and staying through degree completion signals more than raw intellectual horsepower, it also signal some degree of conscientiousness, and also conformity (at some colleges its the friends you're able to make that's valuable)

which many fields value (maybe more than silicon valley does)

[if those field value it, and college signals it, maybe we need to be clear what it means for something to be a market failure then, I don't know]

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again, I don't think we have to think about it as college is EITHER signaling OR improving human capital, it can be both

personally I'm of the opinion that its common to over-invest in the signal behind college

(they usually don't have different equations in the classes you take at IUP [though I'm sure a George Mason education is great])

Brian writes:

Phil,

I don't necessarily disagree with you, but it's not clear that comparing it to invested money is the right way to look at it. Although college is an investment, much of the money to pay for it probably comes out of money that would have been spent on other things rather than invested.

Alternatively, let's suppose you pay for the whole difference with a loan at 5%. Over 10 years, I calculate you pay a total of $189,000 for a $148,000 loan. Over 15 years, it's $210,000. That's the amount that should be compared to the extra $400,000 you make. You also have to take into account discount rates at GMU, etc., which would reduce the amount of the original loan.

Bottom line is that I think they are clearly ways to argue that GMU is worth the extra cost over IUP. And after all, that's what the college market is telling us, right? People continue to choose private colleges (which GMU is in this out-of-state scenario) over state colleges and 4-year colleges over local community colleges, despite the extra expense. There's value to be found there.

Finally, I agree completely that some signaling is involved along with human capital. My point from the Economist data, however, is that there's no evidence of signaling effects precisely where you would most expect them to show up. That implies that signaling is probably on the smaller side compared with human capital. Bryan gives a 50-40-10 estimate for the contributions of ability bias, signaling, and human capital. I am confident he has it backwards, maybe 50-15-35 or possibly 50-20-30, based on my own experience, various pieces of data (like the Economist's), and the general market signal.

Dan Hess writes:

I wanted to post a comment on your 5/13 blog post on open borders, but I see that comments are closed.

Therefore, I'll post it in this thread, instead of that one.

There is a non-selfish case for strong borders, which is the argument from ecology. I have never heard this argument made, but consider ocean ecology.

The open ocean is, relatively speaking, uniform, bland and mostly barren. If you take a square km of open ocean, there will be some life but it will not be very pretty or diverse.

Contrast this with a reef (whether natural or man-made). It is teeming with colorful life of all kinds, with incredible variety and beauty. One square km of reef contains orders of magnitude more life and much more diversity than the open ocean ever could. This is naturally achieved with coral but you can achieve the same effect by sinking a ship or even dropping a rusty city bus in the ocean.

What achieves this? Simply, borders, walls, barriers. If you suddenly made all the walls vanish in a reef ecosystem, surely 99% of all its life would be dead within a week, even though the climate would be the same in all other respects.

Barriers are the stuff that ecosystems are made of, and this is just as true of humans as it is of marine life. Globalists who seek a borderless 'open ocean' are dissolving cultures and reducing human thriving (for most) and actually reducing diversity, quite the opposite of what the globalists claim is their objective.

Phil writes:

@Dan Hess

That's an interesting analogy

I might steal that for some pyrrhic internet debates I get into in the future

Brian writes:

Dan,

I agree with Phil that this is a great analogy. There's no doubt that knocking down borders and increasing free exchange leads to cultural homogenization. I'm not sure, however, that Bryan would care about this. He seems focused on the economic gains from open borders, especially for the poor who would be moving to richer places.

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