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University, Gambling, and the Greater Fool

October 2, 2013 Leave a comment

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.

Who gets the best jobs? The economics evidence

February 2, 2011 2 comments

Lindsey Macmillan

 

Social mobility is back on the agenda with the first meeting of social mobility czar Alan Milburn’s advisory panel taking place next week to assess how well the current coalition Government is doing with its aim of improving social mobility.  So far it might be too early to tell but we do know there is a lot to do.

Tonight’s BBC programme ‘Who gets the best jobs?’ illustrates the growing evidence in the UK that social mobility is worse now than it was a generation ago. Well-cited evidence from economists showed that individuals born to poorer families in 1970 were more likely to end up poor as adults than if they had been born to the same circumstances 15 years previously (Blanden, Gregg, Goodman, Machin, 2004).  Following on from this, research into the potential drivers of mobility found that educational attainment was one of the key factors in accounting for persistence in incomes across generations. For the later cohort born in 1970, the fact that where they came from was a better predictor of their educational attainment than before was a key factor in their lack of mobility (Blanden, Gregg and Macmillan, 2007).

This is not to say however that the change is driven by ability. Ability and education are clearly two different things. It has been argued in the past that some degree of persistence in how well you do compared to where you come from is to be expected given genetic transmissions of ability. The trouble with this argument is that you wouldn’t expect the underlying trend in genetic transmissions to change much across time. If all of the persistence across generations was driven by well-off, more able parents’ having more able children, why would things be getting worse?

Evidence from a report looking into the family background characteristics of those entering top professions illustrates this point. The evidence suggests those who go on to become lawyers and doctors were from substantially richer families than those who went on to become engineers or nurses compared to the average at age 16 in both British cohort studies. Consistent with the mobility evidence, this trend appears to have worsened for many of the top professions over time. For those born in 1970 compared to those born in 1958, the gaps in family income between top professions and the sample average had increased. Evidence on the ability levels of these individuals however suggests that whilst those who became doctors and lawyers were of higher ability than the average, this trend has decreased across time. This would suggest that there is a widening social gap in entry to the top professions. Some of the top professions are increasingly being filled by individuals who look less different to the average in terms of ability and more different to the average in terms of family income (Macmillan, 2009).

One of the main problems with mobility evidence is the length of time it takes to measure trends. All of the evidence mentioned above focuses on individuals now in their 40s and 50s. What do we know about mobility for younger people? A couple of new pieces of work have analysed the link between family background and educational attainment for younger individuals to get a picture of what we might expect from future trends in mobility. The evidence is mixed. On the one-hand, there is some evidence for children born around 1990 that the association between family incomes, Key Stage 2 attainment and GCSE attainment is weakening. This could be a promising sign. There is also the suggestion that post-16 participation has become less associated with where you come from (Gregg and Macmillan, 2009). On the other-hand, there is less evidence of this trend continuing into higher education and no change in the relationship between background and early attainment (age 3 to 5) for children born around 2000 (Blanden and Machin, 2009).

So what can be done?  Identifying policy levers in this setting is often problematic. However, some research in the US from the Perry pre-school program indicates that improving ‘soft skills’ in childhood had positive effects in terms of greater employability, less contact with the police and higher completed education (principally the work of Nobel Laureate James Heckman and others). There is also evidence that lower family income in childhood causes lower educational attainment and lower educational attainment causes lower incomes in adulthood (Dahl and Lochner (2008), Oreopoulus et. al. (2006)).  With this view that education is still a key policy lever in changing patterns of mobility, policies aimed at widening participation in higher education for those from the poorest backgrounds could be important to reversing the current trend of where you come from predicting your educational attainment and hence later-life income. Unfortunately the most recent policy announcements with the scrapping of EMA and trebling of tuition fees are unlikely to encourage such changes in behaviour.

 

Blanden J, Goodman A, Gregg P and Machin S. (2004) Changes in intergenerational mobility in Britain. In M. Corak ed. Generational Income Mobility in North America and Europe, Cambridge University Press, Cambridge.

Blanden J, Gregg P and Macmillan L. (2007) Accounting for intergenerational income persistence: Noncognitive skills, ability and education, The Economic Journal, 117, C43-C60.

Blanden J and Machin S. (2008) Up and down the Generational Income Ladder in Britain; Past Changes in Future Prospects. National Institute Economic Review No. 205.

Dahl G and Lochner L. (2008) The Impact of Family Income on Child Achievement: Evidence from the Earned Income Tax Credit NBER Working Paper No. 14599.

Gregg, P. and Macmillan, L. (2009) Family income and education in the next generation: exploring income gradients in education for current cohorts of youth. Journal of Longitudinal and Life Course Studies, Vol. 1 (3), 259-280

Macmillan, L. (2009) Social mobility and the professions. CMPO report. http://www.bris.ac.uk/cmpo/publications/other/socialmobility.pdf

Oreopoulos P and Page M. (2006) The Intergenerational Effects of Compulsory Schooling. Journal of Labor Economics, 24(4), 729-760.

 

 

What is the value of education?

December 6, 2010 Leave a comment

Rich Harris

 

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?