A radio interview with William Deresiewicz, author of “Excellent Sheep: The Miseducation of the American Elite,” recently caught my ear and got me thinking about the homogeneity in work occupations I see amongst my peer group. It prompted the question- was this due to “risk aversion” or just plain common sense?
The Case for “Risk Averse Sheep”
In a nutshell, Deresiewicz claims in his book that America’s “elite” institutions foster an environment of risk aversion, conformity and the mindless accumulation of awards/grades in order to secure high-paying jobs while discouraging students from exploring careers in the humanities as well as discourse on what a meaningful life actually entails. In support of his arguments he cites, among other pieces of evidence, his own two decades of experience first as a student and then as a faculty member at Columbia and Yale (including working on Yale’s Admissions staff), as well as the notable shift in college majors away from the humanities towards business and technical degrees. As he notes in a related article The Disadvantages of an Elite Education “The college career office has little to say to students not interested in law, medicine, or business, and elite universities are not going to do anything to discourage the large percentage of their graduates who take their degrees to Wall Street.”
Personally, I must say that much of what Deresiewicz notes about the final, observable outcomes rings true. Every UPENN classmate of mine was intent on achieving good grades. Almost every single one left college into the role of either lawyer, doctor, engineer, marketer, salesman, banker, or consultant. Missing were the actors, musicians, writers, poets, and artists of the world. If I extend that more broadly to my circle of friends today, I cannot say that much has changed. Where I differ from Deresiewicz, however, is in the posited motivations for these actions. I think this distribution has everything to do individuals being thoughtful about their life choices and little to do with risk aversion.
The Case for “Thoughtful Sheep”
Rather than make this a qualitative argument, I want to tackle this from a utilitarian angle. The first item then, is to come to a clear understanding of what “risk aversion” means. Risk aversion is simply an individual’s preference for an outcome with a guaranteed payout over an alternative set of outcomes with a higher expected payout but greater uncertainty. To illustrate, if I present two offers:
- I give you $95,000 for certain right now, or
- The chance to win $200,000 or $0 based on calling a coin flip correctly
Then anyone who would go with option 1) is risk averse. To be clear, human nature, and the entirety of economic theory, is predicated on the idea that almost all humans are risk averse (no matter what you see on Deal or No Deal). The entire insurance industry, in fact, requires that this be true. A risk averse utility curve below illustrates that point:
Simply put, the chart above illustrates that given the option of two states (here noted as “Base” and “Base + Bonus”), an individual’s average expected utility will lie somewhere on a line between those two points. To be clear, an individual can only ever be at one of the two points, the line represents their average expected utility . Where on the line that falls depends on the expected likelihood of each state. At every likelihood, however, the expected utility lies below that individual’s utility curve. The downward “bend” of this curve is the decreasing marginal utility we experience with wealth accumulation, which is the very essence of risk aversion. As a result, this risk-averse individual will get greater utility by purchasing insurance to guarantee a given outcome (i.e., sit at the point on the curve above “x”) rather than just getting their average expected utility (i.e., “x”).
What does all this have to do with pursuing an acting career vs. going into law? Here the “boom or bust” acting career is contrasted against the “insurance” of the middling, and much more certain option of going into law. To be clear the “boom” payout of acting is not necessarily only from money but from the satisfaction of pursuing a dream, so it can be substituted with other careers in the humanities which do not necessarily have the option of million-dollar pay days.
What does this have to do with the perceived risk aversion of graduates of “elite vs. non-elite” institutions? The math follows that the greater the utility of the “certain” outcome for a graduate, the more difficult it will be for him or her to choose to roll the dice and “chase their dreams.” If Student A and Student B both are considering moving to Hollywood to pursue an acting career with estimated outcomes (non-monetary utility included) of:
- Being broke: $0 payout, 99% likelihood
- Being a successful movie actor: $8 MM annual payout, 1% chance
The expected payout (utility) here is $80,000 per year for both students. However the critical difference comes from each student’s “insurance” option. Student A has a “certain” job option of reaching the Manager position at a local accounting firm and earning $70,000 a year while Student B comes from an “elite” university and has a “certain” job option of being a mid-level contracts lawyer earning $100,000 a year (net law school expense). Student’s A’s specific level of risk aversion will determine whether running off to Hollywood is a good idea, while Student B doesn’t even have to consider their own degree of risk aversion to know that doing so would lower their average expected utility.
In summary, I think that even if the student populations of “elite institutions” have the same proportion of “dreamers” as the broader population, higher-paying job opportunities ensure that a much smaller proportion of students actually make the decision to chase those dreams. The average starting salary of US graduates was $45,000 in 2013. For Ivy League graduates, it was $62,000 – 37% higher.
Lastly, an interesting secondary result of this type of decision making is that those individuals who come from elite universities who do choose to chase their “binary” dream job likely only do so because they have a much higher-than-average estimation of their own likelihood of success (e.g., 20% chance of “making it” vs. the normal 1%) which then pushes the math in favor of making the jump. Though totally anecdotal, I believe I have seen this effect first-hand. In my stand-up comedy group from college, an astonishingly high-proportion of those who try to “go professional” succeed, while those who believe they likely do not have what it takes become “professionals” with poorly thought out blogs.