Re: Return to Education and IV
Robin Hanson wrote: Now maybe you accept this, and think yourself part of, or advisor to, an elite empowered to make ordinary people do things that are good for them, whether they like it or not. I think that what Bill might say is that even though people under-invest in their own education, they are in fact quite willing to vote for education spending. He might even suggest that qua voters, people recognize and adjust for their failings as consumers. Akerlof and Dickens make a similar argument about retirement savings in *An Economist's Book of Tales*. But here's the crucial question: how sure are you that you and your fellow advisors, and the elites you advise, are substantially less irrational in this process of making ordinary people do things that are good for them? Can't elite advisors be irrational too? I think Bill would say that he's pretty sure. He's seen the data, crunched the numbers, read the literature, etc. If you feel comfortable failing people on their exams, why shouldn't you feel comfortable giving them a failing grade on their decision-making outside of the classroom? But perhaps I'm making Bill sound a little too much like me! -- Prof. Bryan Caplan Department of Economics George Mason University http://www.bcaplan.com [EMAIL PROTECTED] He wrote a letter, but did not post it because he felt that no one would have understood what he wanted to say, and besides it was not necessary that anyone but himself should understand it. Leo Tolstoy, *The Cossacks*
Re: Return to Education and IV
In a message dated 11/4/02 4:30:31 PM, [EMAIL PROTECTED] writes: I think Bill would say that he's pretty sure. He's seen the data, crunched the numbers, read the literature, etc. If you feel comfortable failing people on their exams, why shouldn't you feel comfortable giving them a failing grade on their decision-making outside of the classroom? It's one thing to say that someone has failed the narrow task of grasping the subject matter of one class, and quite another to say that someone has failed the make the right choices in life. The first involved only making a narrow technical assessment; the second a broad moral judgement of the sort that I thought went out of style with the 19th century movement of WASP elites to Americanize all the foolish foreign immigrants (or at least with the 1950s attempt to force everyone into the same bland, homogenized soul-less mainstream religion in the name of fighting godless Communism). Still, I believe that people are entitled to their judgements, however inappropriate they may be, but it's a third thing entirely to think oneself entitled to use the government's monopoly (or near-monopoly in the American case) of legitimized use or threat of force to make people behave according to one's own moral judgements. David Levenstam
Re: Return to Education and IV
Bryan Caplan wrote: Now maybe you accept this, and think yourself part of, or advisor to, an elite empowered to make ordinary people do things that are good for them, whether they like it or not. I think that what Bill might say is that even though people under-invest in their own education, they are in fact quite willing to vote for education spending. He might even suggest that qua voters, people recognize and adjust for their failings as consumers. Akerlof and Dickens make a similar argument about retirement savings in *An Economist's Book of Tales*. I know that Bryan Caplan would say that people as consumers and people as voters are just two different sets of preferences, and there is no particular reason to expect much consistency between them. But that's a pretty unusual position, so I didn't necessarily expect Bill to agree with it. The theory that people as voters recognize and adjust for their failings as consumers works a lot better for self-control problems than for ignorance problems. If people as voters know that people as consumers should get more college, then why don't they just go get more college as consumers? But here's the crucial question: how sure are you that you and your fellow advisors, and the elites you advise, are substantially less irrational in this process of making ordinary people do things that are good for them? Can't elite advisors be irrational too? I think Bill would say that he's pretty sure. He's seen the data, crunched the numbers, read the literature, etc. If you feel comfortable failing people on their exams, why shouldn't you feel comfortable giving them a failing grade on their decision-making outside of the classroom? But under the theories of irrationality that the topic here, people can be quite wrong, and irrationally wrong, even when they feel comfortable and feel pretty sure. If you're going to posit an irrational ability to reason and accept advise in ordinary people, you must be willing to posit such phenomena in elites and their advisors. At which point just feeling sure is not enough. Robin Hanson [EMAIL PROTECTED] http://hanson.gmu.edu Asst. Prof. Economics, George Mason University MSN 1D3, Carow Hall, Fairfax VA 22030- 703-993-2326 FAX: 703-993-2323
Re: Return to Education and IV
Robin Hanson wrote: I know that Bryan Caplan would say that people as consumers and people as voters are just two different sets of preferences, and there is no particular reason to expect much consistency between them. But that's a pretty unusual position, so I didn't necessarily expect Bill to agree with it. The theory that people as voters recognize and adjust for their failings as consumers works a lot better for self-control problems than for ignorance problems. If people as voters know that people as consumers should get more college, then why don't they just go get more college as consumers? Avoiding all responsibility by arguing another person's view is fun. Given what Bill said earlier, the most natural position for him seems to be precisely that people suffer a self-control problem when they make personal schooling choices. After all, he says that people overestimate the return to schooling, but underinvest relative to the actual, lower rate. And he points to over-emphasis on immediate pleasure and pain. Fits the usual self-control mold. But under the theories of irrationality that the topic here, people can be quite wrong, and irrationally wrong, even when they feel comfortable and feel pretty sure. If you're going to posit an irrational ability to reason and accept advise in ordinary people, you must be willing to posit such phenomena in elites and their advisors. You always say this. Why? The fact that *those dummies* are irrational and don't realize this hardly implies that I might be one of those dummies. Dogs are stupid and don't realize this. It hardly implies that I might be as dumb as a dog. -- Prof. Bryan Caplan Department of Economics George Mason University http://www.bcaplan.com [EMAIL PROTECTED] I was so convinced that soon, very soon, by some extraordinary circumstance I should suddenly become the wealthiest and most distinguished person in the world that I lived in constant tremulous expectation of some magic good fortune befalling me. I was always expecting that *it was about to begin* and I on the point of attaining all that man could desire, and I was forever hurrying from place to place, believing that 'it' must be 'beginning' just where I happened not to be. Leo Tolstoy, *Youth*
Re: Return to Education and IV
On 10/25/02, William Dickens wrote: ... the rationality assumptions built into to any inter-temporal optimizing model are so demanding that sort of trying to get it right will get you no where near the predictions of the of the full-rationality-perfect-information model. The deviations are significant both for the individual and for the policy implications. Take saving for retirement. A little irrationality and mandatary saving can cause big increases in welfare. Take college choice. ... people seem to be amazingly uninformed. Anybody who says oh well, there probably getting it approximately right, is kidding him/herself. ... Nearly everyone should get more schooling than they do. This is only one of many intertemporal decisions that people badly screw up because they aren't good at thinking about the future vs. the present. You are assuming that the only way to make good decisions about retirement or college is via direct calculation of costs and benefits across time. An obvious alternative, however, is to rely on the advice of knowledgeable experts. For example, if people would just listen to one William Dickens, they would know to save more for retirement and get more schooling. So in order for irrationality to produce bad decisions about retirement and school, people must not only be bad at thinking about the future, they must also be bad at thinking about whether to take advice from you and similar advisors. Now I am willing to believe that many, perhaps most, people are in fact bad, even irrational, at taking advice. But even so, it is hard to see how it would make sense for an accountable democratic government to push or force people to save or go to school more. If people don't think they need more savings or school, it is hard to see how they would want their government to push them into doing so. So if governments are going to help irrational citizens by pushing them toward more savings and schooling, it would have to be because such governments are run by not-especially accountable elites. Now maybe you accept this, and think yourself part of, or advisor to, an elite empowered to make ordinary people do things that are good for them, whether they like it or not. Maybe you accept that, if asked, ordinary people would not authorize this elite to act this way, and would not accept this elite's advice regarding how they should behave. But here's the crucial question: how sure are you that you and your fellow advisors, and the elites you advise, are substantially less irrational in this process of making ordinary people do things that are good for them? Can't elite advisors be irrational too? For example, might not the self-interest of academics, as sellers of schooling, bias their advice on schooling? Robin Hanson [EMAIL PROTECTED] http://hanson.gmu.edu Asst. Prof. Economics, George Mason University MSN 1D3, Carow Hall, Fairfax VA 22030- 703-993-2326 FAX: 703-993-2323
Re: Return to Education and IV
I have a lot to say in response to Bill on this topic. In fact, I was too fascinated with the topic to sleep well last night. I'm going to begin by answering a few specific points, then give one longer post. William Dickens wrote: If the decision is literally a no-brainer, then failing to consider alternatives is rational. ??!!! Not if they make the wrong choice! OK, I suppose you are going to argue that all the people who didn't have a clue what the return to continuing their education was are the ones for whom it was a no brainer and the ones who were about to drop out all answered my questions correctly. I can't prove that wrong but do you really believe that was what was going on? I doubt that the marginal students were more accurate on *average* returns. But I strongly suspect that the marginal students would have been more pessimistic about *their own* returns. The students who drop out are precisely the ones who say and think I don't know if I'm really getting much out of college. That thought rarely occurs to stronger students. The only evidence I have on this (my survey of Berkeley undergrads taking intermediate macro) suggests that they over estimate the percentage return as well. However, I don't think people act on this information. It is my strong impression that people tremendously overweight their current feelings of happiness or unhappiness about being in school so that on net people don't get as much schooling as they should if they were truly utility maximizes. So what is the behavioral deviation you're talking about? It doesn't seem to be a judgmental bias problem - that cuts in the opposite direction. Is it a self-control problem? I think you're conflating behavioral anomalies with high discount rates and/or high disutility of school. The latter two are perfectly consistent with utility maximization. - - Bill William T. Dickens The Brookings Institution 1775 Massachusetts Avenue, NW Washington, DC 20036 Phone: (202) 797-6113 FAX: (202) 797-6181 E-MAIL: [EMAIL PROTECTED] AOL IM: wtdickens -- Prof. Bryan Caplan Department of Economics George Mason University http://www.bcaplan.com [EMAIL PROTECTED] He wrote a letter, but did not post it because he felt that no one would have understood what he wanted to say, and besides it was not necessary that anyone but himself should understand it. Leo Tolstoy, *The Cossacks*
Re: Return to Education and IV
William Dickens wrote: I see Bill already answered my question. Not the way you think. See my response to yours. I should also add that the social costs of tuition are much higher than the private costs for public universities, making it even more likely that the social return is quite low. I happen to believe the public good argument for education, but even if I didn't, you know as well as I do that you can't attribute the entire cost of the university to its educational product. A big chunk is paying for research. Take that out and I doubt the costs would be so high. After all, no reason why a college education would have to cost that much more than HS unless you want all Profs to be researchers. - - 1. Budget/students is an overestimate. Much less clear that unsubsidized tuition is an overestimate. So what cost are you willing to assign to teaching? In-state tuition? Out of state tuition? If students would have lived at home otherwise, you should also count room and board, minus parental grocery savings. 2. You can think of a lot of research as consumption for faculty. If you have to give them that consumption to make them teach, then you should count the costs of research when you calculate the return to education. There is a bit of a granularity problem (one more student may not require any more research), but if you encourage 1% more kids to go to college, you're going to have to pay for roughly 1% more research. -- Prof. Bryan Caplan Department of Economics George Mason University http://www.bcaplan.com [EMAIL PROTECTED] He wrote a letter, but did not post it because he felt that no one would have understood what he wanted to say, and besides it was not necessary that anyone but himself should understand it. Leo Tolstoy, *The Cossacks*
Re: Return to Education and IV
A belated reply to Bill. William Dickens wrote: Note its the _parents_ in your story who are groaning, not the kids. OK, I'll admit that the no idea was based on what I know it was like when I was going to college in the 70s. However, it is still my impression after 13 years of teaching college that the vast majority of college students not only have never done a present value computation about their decision to go to school, but have never seriously considered the alternative of not going to school - - what they could do, how much they could make, what their lives would be like etc. If the decision is literally a no-brainer, then failing to consider alternatives is rational. Marginal students frequently weigh continuing vs. dropping out (just like they weigh attending vs. not attending!). Are you thinking only of economics majors? Business and economics majors (some) think this way. Do you think the average lit major is? Psych? Pol. Sci? Yes. In fact, right after a lit major tells you his major, he frequently comments on his low expected earnings. I'm a lit major. Not much money in that, but I like it. Standard economic model assumes that most of the costs are forgone earnings. Mom and Dad paying for school should be small potatoes (since you can always go to a state school at low cost). My impression is that this factor ways in people's decisions way out of proportion to its economic value. Maybe back in the '70's. Now in-state tuition is significant. At Mason it's $4400. If you add in housing (as you should if you would have lived at home otherwise), it's up to about $10,000. About the annual pay of a minimum wage job before taxes. But more to the point, I doubt that parents are making any sort of intertemporal comparison in paying for kids school. How many do you think have thought Well, if I invest the money I'm paying for the kids school in corporate AAAs at 6.5% his income from my bequest will be $XX, in 20XX whereas if I pay for his school it will be... No way. What they think is better to teach a man to fish than to buy him fish... or something like that and they fork over the bucks to U. Not the economic model at all. I grant that few open Excel and punch in the numbers. You could improve their decision-making by teaching them to do so. But if college grads earned only 10% more than non-college grads, parents would be a lot less quick to parrot old cliches about fishing. Incidentally, most of your arguments (here and later in this discussion) suggest that people over-estimate the return to education. Is that your real view? -- Prof. Bryan Caplan Department of Economics George Mason University http://www.bcaplan.com [EMAIL PROTECTED] He wrote a letter, but did not post it because he felt that no one would have understood what he wanted to say, and besides it was not necessary that anyone but himself should understand it. Leo Tolstoy, *The Cossacks*
Re: Return to Education and IV
Eric Crampton wrote: On Fri, 25 Oct 2002, William Dickens wrote: continue schooling largely under weights the future benefits. Nearly everyone should get more schooling than they do. This is only one of I see Bill already answered my question. Blunt reaction: Come on! If you really think most students are failing to considering foregone earnings, and these are the big cost of school, then the problem goes in the other direction. I should also add that the social costs of tuition are much higher than the private costs for public universities, making it even more likely that the social return is quite low. -- Prof. Bryan Caplan Department of Economics George Mason University http://www.bcaplan.com [EMAIL PROTECTED] He wrote a letter, but did not post it because he felt that no one would have understood what he wanted to say, and besides it was not necessary that anyone but himself should understand it. Leo Tolstoy, *The Cossacks*
Re: Return to Education and IV
If the decision is literally a no-brainer, then failing to consider alternatives is rational. ??!!! Not if they make the wrong choice! OK, I suppose you are going to argue that all the people who didn't have a clue what the return to continuing their education was are the ones for whom it was a no brainer and the ones who were about to drop out all answered my questions correctly. I can't prove that wrong but do you really believe that was what was going on? Marginal students frequently weigh continuing vs. dropping out (just like they weigh attending vs. not attending!). Agreed, but it is my contention that they don't deal with the future returns in a way an economist would judge as rational. Incidentally, most of your arguments (here and later in this discussion) suggest that people over-estimate the return to education. Is that your real view? If you ask people to think about it my guess is that the average person attending a four year college will give you a response suggesting that they over estimate how much money they will make either when they graduate or if they drop out. The only evidence I have on this (my survey of Berkeley undergrads taking intermediate macro) suggests that they over estimate the percentage return as well. However, I don't think people act on this information. It is my strong impression that people tremendously overweight their current feelings of happiness or unhappiness about being in school so that on net people don't get as much schooling as they should if they were truly utility maximizes. - - Bill William T. Dickens The Brookings Institution 1775 Massachusetts Avenue, NW Washington, DC 20036 Phone: (202) 797-6113 FAX: (202) 797-6181 E-MAIL: [EMAIL PROTECTED] AOL IM: wtdickens
RE: Return to Education and IV
Data that includes going to college almost certainly includes SAT scores. (I also think they correlate strongly with IQ, but haven't looked for that data). I'm sure that the effect of more schooling is higher on those with higher SAT scores. In addition, I'd guess the data includes average, rather than median, income increases, so it is more easily skewed upward by those achieving super-rich status (those overpaid CEOs -- yes, I do think overpaid -- for instance). Tom Grey PS. part of the great benefit of this list is that, often, asking a good question allows somebody else to answer it who has already researched it, or part of it ... so that I don't have to. I'm probably not too much of a free rider. Now I won't argue that some people who get two years of college and then drop out without a degree might not have been better off getting a two year degree of certification, but the first order effect is something like at least a 6.5% increase in income for each year of school completed whether you get a degree or not. - - Bill
Re: Return to Education and IV
Is there a significant difference in the returns to education for those who get schooling in top ranked programs? I thought I remember a Newsweek a couple years back that had a story about SAT scores of successful people (two profiles were G.W. Bush and Gore so I guess it was around 2000), and the point they were trying to make was that those who make the most money generally have SATs in the 1200 and 1300s- good students, but not top students. In addition, the book The Millionaire Next Door describes those that accumulate the most wealth as not necessarily being the top students or having degrees from prestigious universities- and, I believe the authors said that if you make $100,000 per year or more, then years of education is negatively correlated with wealth. Also, the argument that opportunity cost is the largest cost of college, is often used to encourage people to not worry about student loans and and look at more prestigious universities, but is this the case for those who are choosing a top school? With tuitions at $35K + per year, do you make back your investment with a higher expected salary as compared to a school on a lower tier? Jason DeBacker
Re: Return to Education and IV
On Fri, 25 Oct 2002, William Dickens wrote: continue schooling largely under weights the future benefits. Nearly everyone should get more schooling than they do. This is only one of Self-serving Eric, who hopes to be an econoimcs professor, couldn't agree more. Demand for college professors needs to go up. My other side couldn't disagree more strongly. A significant percentage of undergrads should really be in some kind of 2-year trade school instead. The marginal person should get less schooling. The person in the bottom quartile of an undergrad class would make more money by instead enrolling in community college and learning to be an electrician or a plumber. Of course, this is pure assertion and is backed by nothing more than my sense of the matter. Eric Crampton
Re: Return to Education and IV
Of course, very few people, if any, are profoundly rational optimizers, but they are approximate optimizers. This is always the response of mainstream economists when one points out that people obviously are not behaving as models predict. Unfortunately, for a lot of people that is where the discussion stops. The assumption seems to be that all one has to do is add an error term to the prediction of the standard model and all the rest of the results about optimality etc. go through approximately. I think in a lot of cases that isn't right. Fifteen years ago I was relatively lonely in making this assertion and trying to systematically work out the implications of various types of irrationality. Today I've got a lot more company. Economists in general would do well to note that for a wide range of policy questions approximately rational is a far cry from fully rational and to think carefully about the implications of less than full rationality for problems they are working on. - - Bill William T. Dickens The Brookings Institution 1775 Massachusetts Avenue, NW Washington, DC 20036 Phone: (202) 797-6113 FAX: (202) 797-6181 E-MAIL: [EMAIL PROTECTED] AOL IM: wtdickens
Re: Return to Education and IV
In a message dated 10/24/02 10:51:12 AM, [EMAIL PROTECTED] writes: This is always the response of mainstream economists when one points out that people obviously are not behaving as models predict. Unfortunately, for a lot of people that is where the discussion stops. The assumption seems to be that all one has to do is add an error term to the prediction of the standard model and all the rest of the results about optimality etc. go through approximately. I think in a lot of cases that isn't right. Fifteen years ago I was relatively lonely in making this assertion and trying to systematically work out the implications of various types of irrationality. Today I've got a lot more company. Economists in general would do well to note that for a wide range of policy questions approximately rational is a far cry from fully rational and to think carefully about the implications of less than full rationality for problems they are working on. - - Bill A lack of information hardly indicates a lack of goal-pursuit (rationality) nor, I suspect, would many mainstream economists be surprised to find that young people on average have a level of rational ignorance than adults. DBL GMU
Re: Return to Education and IV
because I strongly suspect that 1) people have almost no idea how much it will be worth for them to continue in school, Gee, now you're sounding Austrian! No idea? Come on. Just look at how parents groan when their kids talk about the low-earning majors like sociology, and rejoice when they do CS and the like. There's certainly some plausible guesstimating going on, though I agree it could be improved if people knew the PDV formula and used Excel (as I make my labor undergrads do). Note its the _parents_ in your story who are groaning, not the kids. OK, I'll admit that the no idea was based on what I know it was like when I was going to college in the 70s. However, it is still my impression after 13 years of teaching college that the vast majority of college students not only have never done a present value computation about their decision to go to school, but have never seriously considered the alternative of not going to school - - what they could do, how much they could make, what their lives would be like etc. 2) most people's decisions about schooling have to do with how much they like it vs. how much they like whatever the alternative is (and are therefore fairly short sighted), How much they like it is in turn heavily influenced by how good they are at school - an indirect channel for ability bias. Fine. I'm happy to acknowledge that ability affects decisions to go to school, but my contention is that the decision is more of a present trade-off decision than a future vs. present trade-off as the standard economic analysis maintains. At least my experience with school is that most college kids are looking forward to $$$. They almost never compare current fun of school with current fun of work. Are you thinking only of economics majors? Business and economics majors (some) think this way. Do you think the average lit major is? Psych? Pol. Sci? 3) 2) is heavily influenced by whether mom and dad are willing to pay for you to go to school (or someone else is), and True, though it's not clear what the relevance is. Standard economic model assumes that most of the costs are forgone earnings. Mom and Dad paying for school should be small potatoes (since you can always go to a state school at low cost). My impression is that this factor ways in people's decisions way out of proportion to its economic value. 4) whether mom and dad are willing to pay depends on their own views about the return to education and their bequest motive and has nothing to do with any discount rate. ??? Isn't their view of the return to education a view about the discount rate? Well I suppose if you believe in perfect capital and education markets with completely rational and identical consumers it would have to be, but otherwise why would you think that the return to education would have anything to do with an individual's discount rate? But more to the point, I doubt that parents are making any sort of intertemporal comparison in paying for kids school. How many do you think have thought Well, if I invest the money I'm paying for the kids school in corporate AAAs at 6.5% his income from my bequest will be $XX, in 20XX whereas if I pay for his school it will be... No way. What they think is better to teach a man to fish than to buy him fish... or something like that and they fork over the bucks to U. Not the economic model at all. - - Bill William T. Dickens The Brookings Institution 1775 Massachusetts Avenue, NW Washington, DC 20036 Phone: (202) 797-6113 FAX: (202) 797-6181 E-MAIL: [EMAIL PROTECTED] AOL IM: wtdickens
Re: Return to Education and IV
The history majors knew they'd make less with a history degree, on average, but placed a higher value on doing something they enjoyed then on having a higher income. Yes, but did they know how much of a difference it would make? I once did a survey of students in one of my undergraduate economics classes about their knowledge of gains from additional years of education. What I found was that: 1. They thought the average HS graduate made about 30% more than that person actually makes, 2. They thought the average family income was 50% above what it actually was at the time, 3. They thought that going to college would double their income (and would do the same for anyone - - this was early 80s before the big gains so it wasn't anywhere near close) 4. The standard deviation of their estimates of the _average_ return to attending college was over 15 percentage points. Of course I'm sure that they actually knew the answers perfectly well, but couldn't be bothered to answer my questions accurately being the profoundly rational optomizers that they are... ;-} - - Bill Dickens William T. Dickens The Brookings Institution 1775 Massachusetts Avenue, NW Washington, DC 20036 Phone: (202) 797-6113 FAX: (202) 797-6181 E-MAIL: [EMAIL PROTECTED] AOL IM: wtdickens
Re: Return to Education and IV
But controling for IQ isn't warranted if years of schooling is endogenous. Kevin Lang has written extensively about these issues. - - Bill William T. Dickens The Brookings Institution 1775 Massachusetts Avenue, NW Washington, DC 20036 Phone: (202) 797-6113 FAX: (202) 797-6181 E-MAIL: [EMAIL PROTECTED] AOL IM: wtdickens [EMAIL PROTECTED] 10/17/02 19:46 PM Alex T Tabarrok wrote: Bryan's question, however, can be rephrased as not how do you explain the data (low ability bias and high discount rate bias) but why is it that ability bias appears low? Ability bias isn't really low. Using the NLSY data, for example, controlling for AFQT scores reduces the naive estimate of the return to education from 12.6% to 7.5%. Ability bias *after* controlling for intelligence might be low, though. In other words aren't there good grounds for thinking that ability bias is large? And if so how is it that this doesn't show up in the data? Alex -- Alexander Tabarrok Department of Economics, MSN 1D3 George Mason University Fairfax, VA, 22030 Tel. 703-993-2314 and Director of Research The Independent Institute 100 Swan Way Oakland, CA, 94621 Tel. 510-632-1366 -- Prof. Bryan Caplan Department of Economics George Mason University http://www.bcaplan.com [EMAIL PROTECTED] He wrote a letter, but did not post it because he felt that no one would have understood what he wanted to say, and besides it was not necessary that anyone but himself should understand it. Leo Tolstoy, *The Cossacks*
Re: Return to Education and IV
William Dickens wrote: But controling for IQ isn't warranted if years of schooling is endogenous. Kevin Lang has written extensively about these issues. - - Could you enlighten us? Bill William T. Dickens The Brookings Institution 1775 Massachusetts Avenue, NW Washington, DC 20036 Phone: (202) 797-6113 FAX: (202) 797-6181 E-MAIL: [EMAIL PROTECTED] AOL IM: wtdickens [EMAIL PROTECTED] 10/17/02 19:46 PM Alex T Tabarrok wrote: Bryan's question, however, can be rephrased as not how do you explain the data (low ability bias and high discount rate bias) but why is it that ability bias appears low? Ability bias isn't really low. Using the NLSY data, for example, controlling for AFQT scores reduces the naive estimate of the return to education from 12.6% to 7.5%. Ability bias *after* controlling for intelligence might be low, though. In other words aren't there good grounds for thinking that ability bias is large? And if so how is it that this doesn't show up in the data? Alex -- Alexander Tabarrok Department of Economics, MSN 1D3 George Mason University Fairfax, VA, 22030 Tel. 703-993-2314 and Director of Research The Independent Institute 100 Swan Way Oakland, CA, 94621 Tel. 510-632-1366 -- Prof. Bryan Caplan Department of Economics George Mason University http://www.bcaplan.com [EMAIL PROTECTED] He wrote a letter, but did not post it because he felt that no one would have understood what he wanted to say, and besides it was not necessary that anyone but himself should understand it. Leo Tolstoy, *The Cossacks* -- Prof. Bryan Caplan Department of Economics George Mason University http://www.bcaplan.com [EMAIL PROTECTED] He wrote a letter, but did not post it because he felt that no one would have understood what he wanted to say, and besides it was not necessary that anyone but himself should understand it. Leo Tolstoy, *The Cossacks*
Re: Return to Education and IV
William Dickens wrote: As I remember the standard neo-classical answer to this is that the main source of endogenaity isn't ability bias but discount rate bias - - that people with below average discount rates get more schooling. I hadn't thought of that (or heard it). Is there actually any evidence on discount rates and educational attainment? We both know there is a lot of evidence on ability (IQ) and educational attainment. High estimated returns to education are usually claimed to be evidence of credit market imperfections. It seems that the welfare implications are quite different if the real problem is high discount rates. So if the question you want to know is the effect of attending high school vs. only going through the 11th grade for the average person the return appears lower if you don't take into account that the average discount rate of people who drop out at 11 is much higher than the average discount rate of those who finish high school. - - Bill Dickens William T. Dickens The Brookings Institution 1775 Massachusetts Avenue, NW Washington, DC 20036 Phone: (202) 797-6113 FAX: (202) 797-6181 E-MAIL: [EMAIL PROTECTED] AOL IM: wtdickens [EMAIL PROTECTED] 10/16/02 02:13PM I've occasionally heard that instrumental variables (IV) estimators of the return to education yield markedly higher estimates than OLS. Is this true? And how can this make any intuitive sense? If IV is correcting for endogeneity, you would expect things to go the other way. Why? With a medical treatment, you would expect endogeneity to understate the benefit, because sicker people are more likely to voluntarily seek treatment. But with education, you would expect endogeneity to overstate the benefit, because able people are more likely to voluntarily enroll. -- Prof. Bryan Caplan Department of Economics George Mason University http://www.bcaplan.com [EMAIL PROTECTED] He wrote a letter, but did not post it because he felt that no one would have understood what he wanted to say, and besides it was not necessary that anyone but himself should understand it. Leo Tolstoy, *The Cossacks* -- Prof. Bryan Caplan Department of Economics George Mason University http://www.bcaplan.com [EMAIL PROTECTED] He wrote a letter, but did not post it because he felt that no one would have understood what he wanted to say, and besides it was not necessary that anyone but himself should understand it. Leo Tolstoy, *The Cossacks*
Re: Return to Education and IV
Just a note on discount rates. The late sociologist Ed Banfield had an entire theory of poverty, education, crime, and in general, class distinction based not on income but on discount rates, e.g. higher rates, less education, more crime, lower-class behavior. It was very intuitive in terms of a lot of observed behavior but I don't believe he explained well how how you empirically measure individual discount rates Seems the name of the book was The Unheavenly City. He was influential early on in the Nixon administration. Rodney Weiher Bryan Caplan wrote: William Dickens wrote: As I remember the standard neo-classical answer to this is that the main source of endogenaity isn't ability bias but discount rate bias - - that people with below average discount rates get more schooling. I hadn't thought of that (or heard it). Is there actually any evidence on discount rates and educational attainment? We both know there is a lot of evidence on ability (IQ) and educational attainment. High estimated returns to education are usually claimed to be evidence of credit market imperfections. It seems that the welfare implications are quite different if the real problem is high discount rates. So if the question you want to know is the effect of attending high school vs. only going through the 11th grade for the average person the return appears lower if you don't take into account that the average discount rate of people who drop out at 11 is much higher than the average discount rate of those who finish high school. - - Bill Dickens William T. Dickens The Brookings Institution 1775 Massachusetts Avenue, NW Washington, DC 20036 Phone: (202) 797-6113 FAX: (202) 797-6181 E-MAIL: [EMAIL PROTECTED] AOL IM: wtdickens [EMAIL PROTECTED] 10/16/02 02:13PM I've occasionally heard that instrumental variables (IV) estimators of the return to education yield markedly higher estimates than OLS. Is this true? And how can this make any intuitive sense? If IV is correcting for endogeneity, you would expect things to go the other way. Why? With a medical treatment, you would expect endogeneity to understate the benefit, because sicker people are more likely to voluntarily seek treatment. But with education, you would expect endogeneity to overstate the benefit, because able people are more likely to voluntarily enroll. -- Prof. Bryan Caplan Department of Economics George Mason University http://www.bcaplan.com [EMAIL PROTECTED] He wrote a letter, but did not post it because he felt that no one would have understood what he wanted to say, and besides it was not necessary that anyone but himself should understand it. Leo Tolstoy, *The Cossacks* -- Prof. Bryan Caplan Department of Economics George Mason University http://www.bcaplan.com [EMAIL PROTECTED] He wrote a letter, but did not post it because he felt that no one would have understood what he wanted to say, and besides it was not necessary that anyone but himself should understand it. Leo Tolstoy, *The Cossacks*
Re: Return to Education and IV
Rodney F Weiher wrote: Just a note on discount rates. The late sociologist Ed Banfield had an entire theory of poverty, education, crime, and in general, class distinction based not on income but on discount rates, e.g. higher rates, less education, more crime, lower-class behavior. Yes, it is a great book that I cite in my recent working paper with Scott Beaulier. It was very intuitive in terms of a lot of observed behavior but I don't believe he explained well how how you empirically measure individual discount rates Seems the name of the book was The Unheavenly City. He was influential early on in the Nixon administration. Rodney Weiher Bryan Caplan wrote: William Dickens wrote: As I remember the standard neo-classical answer to this is that the main source of endogenaity isn't ability bias but discount rate bias - - that people with below average discount rates get more schooling. I hadn't thought of that (or heard it). Is there actually any evidence on discount rates and educational attainment? We both know there is a lot of evidence on ability (IQ) and educational attainment. High estimated returns to education are usually claimed to be evidence of credit market imperfections. It seems that the welfare implications are quite different if the real problem is high discount rates. So if the question you want to know is the effect of attending high school vs. only going through the 11th grade for the average person the return appears lower if you don't take into account that the average discount rate of people who drop out at 11 is much higher than the average discount rate of those who finish high school. - - Bill Dickens William T. Dickens The Brookings Institution 1775 Massachusetts Avenue, NW Washington, DC 20036 Phone: (202) 797-6113 FAX: (202) 797-6181 E-MAIL: [EMAIL PROTECTED] AOL IM: wtdickens [EMAIL PROTECTED] 10/16/02 02:13PM I've occasionally heard that instrumental variables (IV) estimators of the return to education yield markedly higher estimates than OLS. Is this true? And how can this make any intuitive sense? If IV is correcting for endogeneity, you would expect things to go the other way. Why? With a medical treatment, you would expect endogeneity to understate the benefit, because sicker people are more likely to voluntarily seek treatment. But with education, you would expect endogeneity to overstate the benefit, because able people are more likely to voluntarily enroll. -- Prof. Bryan Caplan Department of Economics George Mason University http://www.bcaplan.com [EMAIL PROTECTED] He wrote a letter, but did not post it because he felt that no one would have understood what he wanted to say, and besides it was not necessary that anyone but himself should understand it. Leo Tolstoy, *The Cossacks* -- Prof. Bryan Caplan Department of Economics George Mason University http://www.bcaplan.com [EMAIL PROTECTED] He wrote a letter, but did not post it because he felt that no one would have understood what he wanted to say, and besides it was not necessary that anyone but himself should understand it. Leo Tolstoy, *The Cossacks* -- Prof. Bryan Caplan Department of Economics George Mason University http://www.bcaplan.com [EMAIL PROTECTED] He wrote a letter, but did not post it because he felt that no one would have understood what he wanted to say, and besides it was not necessary that anyone but himself should understand it. Leo Tolstoy, *The Cossacks*
Re: Return to Education and IV
Alex T Tabarrok wrote: Bryan's question, however, can be rephrased as not how do you explain the data (low ability bias and high discount rate bias) but why is it that ability bias appears low? Ability bias isn't really low. Using the NLSY data, for example, controlling for AFQT scores reduces the naive estimate of the return to education from 12.6% to 7.5%. Ability bias *after* controlling for intelligence might be low, though. In other words aren't there good grounds for thinking that ability bias is large? And if so how is it that this doesn't show up in the data? Alex -- Alexander Tabarrok Department of Economics, MSN 1D3 George Mason University Fairfax, VA, 22030 Tel. 703-993-2314 and Director of Research The Independent Institute 100 Swan Way Oakland, CA, 94621 Tel. 510-632-1366 -- Prof. Bryan Caplan Department of Economics George Mason University http://www.bcaplan.com [EMAIL PROTECTED] He wrote a letter, but did not post it because he felt that no one would have understood what he wanted to say, and besides it was not necessary that anyone but himself should understand it. Leo Tolstoy, *The Cossacks*
Re: Return to Education and IV
As I remember the standard neo-classical answer to this is that the main source of endogenaity isn't ability bias but discount rate bias - - that people with below average discount rates get more schooling. So if the question you want to know is the effect of attending high school vs. only going through the 11th grade for the average person the return appears lower if you don't take into account that the average discount rate of people who drop out at 11 is much higher than the average discount rate of those who finish high school. - - Bill Dickens William T. Dickens The Brookings Institution 1775 Massachusetts Avenue, NW Washington, DC 20036 Phone: (202) 797-6113 FAX: (202) 797-6181 E-MAIL: [EMAIL PROTECTED] AOL IM: wtdickens [EMAIL PROTECTED] 10/16/02 02:13PM I've occasionally heard that instrumental variables (IV) estimators of the return to education yield markedly higher estimates than OLS. Is this true? And how can this make any intuitive sense? If IV is correcting for endogeneity, you would expect things to go the other way. Why? With a medical treatment, you would expect endogeneity to understate the benefit, because sicker people are more likely to voluntarily seek treatment. But with education, you would expect endogeneity to overstate the benefit, because able people are more likely to voluntarily enroll. -- Prof. Bryan Caplan Department of Economics George Mason University http://www.bcaplan.com [EMAIL PROTECTED] He wrote a letter, but did not post it because he felt that no one would have understood what he wanted to say, and besides it was not necessary that anyone but himself should understand it. Leo Tolstoy, *The Cossacks*
