Author: Michael Sanders
University, Gambling, and the Greater Fool
The betting company Ladbrokes have begun offering students (and their parents) the opportunity to bet on their eventual university degree classifications. This, as may have been predictable (and may have been the intention) has attracted a level of opprobrium from groups concerned about youngsters gambling away their student loans foolishly.
What does economics tell us about this? To begin with, this looks like a fairly standard asymmetric information problem, from which students can only benefit. In general, it is not sensible to make a bet with someone who has more information with you, or who has control over the outcome of that bet. For example, I bet you a million pounds that the next sentence will contain the word banana. Clearly, you won’t take the bet because I can control the outcome banana.
For students, the deal is a good one. They know how clever they are, and they know how hard they will work. Even if there is some noise associated with their outcome (bad days, sick pets, or grandmother fatalities), it is a fair bet that the people beginning their university lives this week have more control over the outcome than Ladbrokes do. So why are Ladbrokes taking these bets (and actively encouraging them)?
One possibility is that Ladbrokes are cash poor, and want to raise finance quickly. They take money in now from students placing their bets, but don’t need to pay out for three years. A perfectly sound theoretical argument, but it seems unlikely, either (a) that Ladbrokes can’t find better rates on what is essentially a loan on the open market, or (b) that students are so cash rich that they’re making long term investments.
A second possibility is that Ladbrokes is a ‘greater fool’ – a person who buys high and sells cheap, so that the rest of us can profit. Given their track record, I suspect not.
More likely, they are relying on students being greater fools. Where traditional economic theory tends to assume that agents observe their own quality with certainty (or, in English, what we know how good we are), behavioural economics suggests otherwise.
Overconfidence is an issue across many dimensions. It leads us to pay for expensive gym contracts we’ll never use and to drive less carefully than we should . Even among hyper-rational investors, it leads to over-investment in our own firms. So, even though we know that only 5% of students will get a first class degree, we rate our own chances at 10%. For some people this may be true, but for most it will not, and so firms like Ladbrokes can profit from our misconception.
Behavioural Economics offers useful tips on self control, and I’d encourage anyone at the beginning of their university career (or later in), to think about them seriously. There are times when it is good to be a greater fool, this is not one of them.
Post Script: A Rational Bet
On circulating this post internally, I’ve been asked under what circumstances you should take this bet. For almost everyone at Bristol, studying the social sciences, the odds you’ll get betting on a 2:1 are probably about 5/6 (Bristol isn’t one of those featured on the Ladbrokes site), so you’d lose money whatever you do. If you’re confident of getting a 2:1, however, you might be interested to know what happens if you work a bit less hard and bet on yourself getting a 2:2. Here the odds are better, probably about 12:5 – so you’ll get your initial investment back, plus an additional 140%. A recent working paper from the LSE finds that the return to a 2:1 is 2040 a year. If we extrapolate this for a 45 year career, that’s an extra £91800 over the course of your lifetime. Assuming a constant rate of inflation at 3% over that time, you’d need £181,516 now in order to maintain the same standard of living for your entire life. To win that, you’d need to bet £129,654 right now in order to be indifferent between getting a 2:2 and winning the bet, or getting a 2:1 and not betting. I’d still recommend against it, though.
The UK education system has been firmly in the headlines. Whether it’s the Coalition Government’s Schools White Paper, The Importance of Teaching, or students protesting against the Government’s response to the Browne report (Securing a Sustainable Future for Higher Education in London) the critical issue of whether education is a public or private good is being discussed and debated rigorously, though not necessarily in those terms.
Of course, it’s both. Though one might question the (historic) figures bandied around to assert the wage premium a higher education degree is said to attract, and certainly discount the idea it will apply to everyone who passes through a University, it must be true that one of the motivations that attracts students to University study is the prospect of a well-paid job. Nothing wrong with that. Indeed, it is often the transferable skills and training that Universities offer that make them an attractive proposition for internal as well as overseas students. On the other hand, at a time when the talk is of ‘the Big Society’ and about measuring happiness not merely economic output as a measure of the country’s progress, it would be odd to stop valuing learning as a social and cultural good in its own right. There may not always be an immediate and tangible economic return but were Universities ever intended to be just the training partners of industry, business and commerce?
Meanwhile, the new academies and free school programmes outlined by Michael Gove MP, Secretary of State for Education, have reignited the debate about social polarization if the best performing schools opt-out of local authority governance and, it is assumed, begin to attract the better (meaning middle-class) pupils who then receive a better funded educational experience than those left “trapped” in the less desirable schools. Here again, we encounter the question, who is education for? The individual recipients? Society as a whole? Or, both (in which case, how are they balanced?).
In A Journey, Tony Blair staunchly defends the New Labour policy of promoting school choice. The basic argument is who is government to hold back those who want to innovate, to be successful, to want the best for their children? It’s compelling but critics of those and current policies might argue they are individualistic. They miss the broader social point that it is not a level playing field: those with the resources and influence to do so, it is alleged, are best able to capitalise on the system. They will be the “winners” and inequalities will grow. And inequalities, according to the authors of the much publicised and debated book The Spirit Level are socially damaging.
But is it true? Have policies of school choice, partial marketisation and competition actually raised levels of social polarization? For schools the evidence remains unclear: see past CMPO papers and a forthcoming CMPO working paper reviewing the literature to date. In Higher Education, University education is not the preserve of the elite and the wealthy. In fact, the traditional image of the ivory towers where fresh-faced young students travel from the Home Counties along the M4 to study for three years away from home increasingly is misleading. Many students are part-time, mature and live at home. And, though young people from more affluent areas are still more likely to attend University, young people from disadvantaged areas have been substantially more likely to enter higher education since the mid-2000s (see Trends in young participation in higher education: core results for England, HEFCE, 2010). It would also not be unreasonable to suggest that the professionalization of teaching with Universities, though still not as strongly valued as it should be, is driven in response to the raised expectation of fee-paying students.
Yet, that was before a near three-fold increase in fees that will see the Aimhigher programme (promoting widening participation) axed and which will make the English University system the most expensive in the world, saddling students with a debt for up to 30 years. Quite what the effects on the housing and mortgage markets will be when graduates must first pay a fixed proportion of their salary to repay their student fees can only be guessed at. Will it be the case that only those from the “best schools” will be able to afford to go on and attend the “best universities”? Only time will tell.
In the meantime, the debate continues. What is that value of education? And who or what gains from it?