3 ms·

Returns to education over the past half-century have beaten the US stock market

37 points by known 9y ago

microcolonel 9y ago
These things are fun to compare for leisure, but no arguments or prescriptions can be made from a comparison like this. Business opportunities, including those represented by listed public companies, provide the majority of motivation for higher education. Furthermore, unlike the stock market, there is no direct way to inject funds into higher education and expect returns: each student is unique, and their reasons for taking on debt or working toward scholarships are related to the returns they expect when they reenter the market. Taken to the extreme, treatment of higher education as a commodity investment will encourage diminishing returns.
lokimedes 9y ago
Are they factoring in the rent seeking aspects of the stockmarket? This is only a relevant comparison if the implied effort is similar for both ROIs
conjecTech 9y ago
Wow. I'm a bit shocked. At first I thought the title was a misinterpretation of the statistics presented in the article by the poster, but it seems that the author actually offered that comparsion themselves. 'an annual average “rate of return”—actually a pay premium, the increase in hourly earnings from an extra year of schooling—of 8.8%. The analogy is inexact, but for comparison America’s stockmarket returned an annual 5.6% over the past 50 years.' Those are in no way comparable! Encouraging poor interpretations of statistics on important issues like this is actively harmful! This has to be some of the laziest reporting I have ever seen. At a minimum, can we please change the title on this?
- darawk 9y ago
  This isn't even a misinterpretation of statistics, which is actually complicated and understandable...it's literally a misunderstanding of how rates work.
  - tripletao 9y ago
    From the article: > The analogy is inexact, but for comparison America’s stockmarket [...] So the author thought, "I know this is wrong, but I'll do it anyways and add a note"? And they literally call the publication The Economist... The return on investment of education is an interesting and difficult question, to distinguish the difference between the people who do and don't seek the education from the difference actually caused by the education. The best results come from natural experiments, like sudden changes in the number of university places available; but even those capture only the effect on the marginal applicant. This of course is mostly unrelated to the article.
- dang 9y ago
  Yes. We've changed it to the subtitle, since it's less baity than the main title. Submitted title was "In past 50 years rate of return in Education = 8.8% and in US stockmarket = 5.6%". I assume that was a well-intentioned attempt to rewrite a baity title as the guidelines ask (https://news.ycombinator.com/newsguidelines.html https://news.ycombinator.com/newsguidelines.html), but it's better to use language from the article, and the magic numbers violate the guidelines in another way.
Dwolb 9y ago
Hm I initially agreed with everyone here that there's no way to really compare the two since I thought about this on a personal level. However my current rationalization of the title thinks about this on a societal level. If you're the government and have $1B, would you rather fund education directly (through debt) or invest $1B in the stock market? On average you'd expect the wages of everyone you funded to grow at 8.8% of which the government can harvest an average tax rate. Additionally the government can take an interest rate on the debt.
- whatshisface 9y ago
  The 8.8% figure came from "an extra year of school," which has absolutely nothing to do with a return on the cost of an extra year of school. The statistic says nothing about how much that $1B would actually grow. Is there a trade-off between academia and industry? Sure, but the economist has made an hilarious pants-down mistake in evaluating it. Maybe the ROI on an extra year of school would be even higher for the author ;)
  - Dwolb 9y ago
    Sure but we can derive it. We'd have to know the answer: on average how many extra years of school does $1B fund?
    - whatshisface 9y ago
      It still wouldn't be comparable: the 8.8% is from an increase on earnings per hours worked, not an interest-style return on tuition money. You would also need to know what people were making on the job.
      - Dwolb 9y ago
        Agreed we'd need to figure out average current salary. Any additional info we need to gather?
quickthrower2 9y ago
If you put that 1 years school money into the stock market, it will keep giving the 5.6% when you are not working. If you take time out to start a start up, go travelling, or get sick then the educational ROI falls to 0 for that time, while the stock market keeps (on average) delivering. Also capital gains tax vs. income tax. Also I'm from another country where you could offset the interest paid on the load to acquire the shares, against dividends, and if the interest paid > dividends, reduce your income tax bill accordingly.
- vasco 9y ago
  Where are you from? Your government basically gives you an incentive to get leveraged?
  - quickthrower2 9y ago
    Australia
cardosof 9y ago
I know some folks at the World Bank and I'm sure they invested a lot in education prior to joining - you need a economics-related PhD to become a junior research analyst there. Therefore, this study is the result of trained professionals. Having said that, I'm skeptical of the results - the final numbers are averages but I'd like to see the distributions.
- zawerf 9y ago
  Just curious as a non-economist, how would you even conduct this study in a controlled way? You would basically have take two randomized groups both starting with 200k and have one invest it into stocks and another into a 4 year college degree and compare net worth a few decades later. Even then you would only be answering the question of whether that decision was optimal for that point in time.
  - tripletao 9y ago
    You can do correlation studies, and try to control for all the factors that distinguish the people who enter college from the people who don't, to distinguish that selection effect from the actual benefit of the education. There are studies like that; but since you can never be sure you've controlled for all factors, they're suspect. An artificial experiment would be nice, but the cost, ethics, etc. make it not too practical. The best research uses natural experiments, like when some external factor changes the number of university places available, so that people who would have gone to college in the 2017 cohort don't in 2018 (or vice versa). That gives you the answer for the marginal applicant (i.e., the applicant who was just on the edge of qualifying), though, not the average.
jerkstate 9y ago
"past performance is not an indicator of future results"
sanxiyn 9y ago
Note that this is an average. Not all students complete a degree, and this has large effect on education ROI. If you are unlikely to complete an undergraduate degree, going to a college is a bad investment. Bryan Caplan painstakingly calculated return depending on student ability. For a median student (50th percentile), college is a bad investment.
meirdavis 9y ago
In most countries where education is cheaper than the US, people don't even think about this comparison. The main cost of education is the effort, not the monetary expense. This article totally ignores the effort of going to Uni.

37 points by known 9y ago

These things are fun to compare for leisure, but no arguments or prescriptions can be made from a comparison like this. Business opportunities, including those represented by listed public companies, provide the majority of motivation for higher education. Furthermore, unlike the stock market, there is no direct way to inject funds into higher education and expect returns: each student is unique, and their reasons for taking on debt or working toward scholarships are related to the returns they expect when they reenter the market. Taken to the extreme, treatment of higher education as a commodity investment will encourage diminishing returns.

lokimedes 9y ago

Are they factoring in the rent seeking aspects of the stockmarket? This is only a relevant comparison if the implied effort is similar for both ROIs

conjecTech 9y ago

Wow. I'm a bit shocked. At first I thought the title was a misinterpretation of the statistics presented in the article by the poster, but it seems that the author actually offered that comparsion themselves. 'an annual average “rate of return”—actually a pay premium, the increase in hourly earnings from an extra year of schooling—of 8.8%. The analogy is inexact, but for comparison America’s stockmarket returned an annual 5.6% over the past 50 years.' Those are in no way comparable! Encouraging poor interpretations of statistics on important issues like this is actively harmful! This has to be some of the laziest reporting I have ever seen. At a minimum, can we please change the title on this?

darawk 9y ago
This isn't even a misinterpretation of statistics, which is actually complicated and understandable...it's literally a misunderstanding of how rates work.
- tripletao 9y ago
  From the article: > The analogy is inexact, but for comparison America’s stockmarket [...] So the author thought, "I know this is wrong, but I'll do it anyways and add a note"? And they literally call the publication The Economist... The return on investment of education is an interesting and difficult question, to distinguish the difference between the people who do and don't seek the education from the difference actually caused by the education. The best results come from natural experiments, like sudden changes in the number of university places available; but even those capture only the effect on the marginal applicant. This of course is mostly unrelated to the article.
dang 9y ago
Yes. We've changed it to the subtitle, since it's less baity than the main title. Submitted title was "In past 50 years rate of return in Education = 8.8% and in US stockmarket = 5.6%". I assume that was a well-intentioned attempt to rewrite a baity title as the guidelines ask (https://news.ycombinator.com/newsguidelines.html https://news.ycombinator.com/newsguidelines.html), but it's better to use language from the article, and the magic numbers violate the guidelines in another way.

Dwolb 9y ago

Hm I initially agreed with everyone here that there's no way to really compare the two since I thought about this on a personal level. However my current rationalization of the title thinks about this on a societal level. If you're the government and have $1B, would you rather fund education directly (through debt) or invest $1B in the stock market? On average you'd expect the wages of everyone you funded to grow at 8.8% of which the government can harvest an average tax rate. Additionally the government can take an interest rate on the debt.

whatshisface 9y ago
The 8.8% figure came from "an extra year of school," which has absolutely nothing to do with a return on the cost of an extra year of school. The statistic says nothing about how much that $1B would actually grow. Is there a trade-off between academia and industry? Sure, but the economist has made an hilarious pants-down mistake in evaluating it. Maybe the ROI on an extra year of school would be even higher for the author ;)
- Dwolb 9y ago
  Sure but we can derive it. We'd have to know the answer: on average how many extra years of school does $1B fund?
  - whatshisface 9y ago
    It still wouldn't be comparable: the 8.8% is from an increase on earnings per hours worked, not an interest-style return on tuition money. You would also need to know what people were making on the job.
    - Dwolb 9y ago
      Agreed we'd need to figure out average current salary. Any additional info we need to gather?

quickthrower2 9y ago

If you put that 1 years school money into the stock market, it will keep giving the 5.6% when you are not working. If you take time out to start a start up, go travelling, or get sick then the educational ROI falls to 0 for that time, while the stock market keeps (on average) delivering. Also capital gains tax vs. income tax. Also I'm from another country where you could offset the interest paid on the load to acquire the shares, against dividends, and if the interest paid > dividends, reduce your income tax bill accordingly.

vasco 9y ago
Where are you from? Your government basically gives you an incentive to get leveraged?
- quickthrower2 9y ago
  Australia

cardosof 9y ago

I know some folks at the World Bank and I'm sure they invested a lot in education prior to joining - you need a economics-related PhD to become a junior research analyst there. Therefore, this study is the result of trained professionals. Having said that, I'm skeptical of the results - the final numbers are averages but I'd like to see the distributions.

zawerf 9y ago
Just curious as a non-economist, how would you even conduct this study in a controlled way? You would basically have take two randomized groups both starting with 200k and have one invest it into stocks and another into a 4 year college degree and compare net worth a few decades later. Even then you would only be answering the question of whether that decision was optimal for that point in time.
- tripletao 9y ago
  You can do correlation studies, and try to control for all the factors that distinguish the people who enter college from the people who don't, to distinguish that selection effect from the actual benefit of the education. There are studies like that; but since you can never be sure you've controlled for all factors, they're suspect. An artificial experiment would be nice, but the cost, ethics, etc. make it not too practical. The best research uses natural experiments, like when some external factor changes the number of university places available, so that people who would have gone to college in the 2017 cohort don't in 2018 (or vice versa). That gives you the answer for the marginal applicant (i.e., the applicant who was just on the edge of qualifying), though, not the average.

jerkstate 9y ago

"past performance is not an indicator of future results"

sanxiyn 9y ago

Note that this is an average. Not all students complete a degree, and this has large effect on education ROI. If you are unlikely to complete an undergraduate degree, going to a college is a bad investment. Bryan Caplan painstakingly calculated return depending on student ability. For a median student (50th percentile), college is a bad investment.

meirdavis 9y ago

In most countries where education is cheaper than the US, people don't even think about this comparison. The main cost of education is the effort, not the monetary expense. This article totally ignores the effort of going to Uni.