This post was supposed to go up last week, but I have been on the road for the last two weeks talking to groups and individuals about “What’s Your Future Worth?” and how to apply Present Value in many different contexts. As a result, I am just now sitting down to write.
During that time, I was fortunate enough to have had the chance to talk to an amazing variety of very smart people including doctors, entertainers, finance professionals, mathematicians, psychologists and even a few actuaries about the book and my belief that the actuarial perspective can be broadly applied to help make the world a better place. Some of that trip is documented in other parts of this site, and future blog posts will dig into some of the very good questions about the many possible uses of Present Value in the real world that were raised in those discussions, but today I want to talk about another “real world” decision that I am working on right now.
In addition to speaking about my book, the other reason for my long road trip was to engage in a ritual that many of you have already have been through or are contemplating in the near future – i.e. the “college campus tour”.
You see, my son Adam just had his 16th birthday and is now turning his (and our) attention to where he wants to go to college and more generally what path he wants to pursue in life. When I was his age, more than 40 years ago, it would have seemed bizarre, or at least pretty “nerdy”, to start thinking about such matters so soon, but it is a different world today and in order to even have the opportunity to follow the kinds of alternative paths that he wants to choose from, Adam needs to start thinking (and taking action) right now.
It’s a frightening and intimidating situation. For the last few months our mailbox has been peppered with offers for SAT coaching, college application consulting, and any number of other services and “opportunities” for us to “learn more” or “better prepare” our son to get into and thrive at the best possible college. Meanwhile, in the background, the media is filled with stories of how the “college industrial complex” continues to grow in size and expense, and how getting into the right school is critical to a child’s career, future economic status and basic happiness.
Human nature being what it is, the notion that this is a high-stakes game that we all MUST participate in has also produced a situation where it is now much harder to get into a good school than it used to be. The fact that this is generally due to the fact that kids are applying to more schools per student, rather than to an actual increase in students or standards does not make it any less real, and a failure to participate in the madness is not really a solution – one person’s decision to only apply to 3-4 schools will not affect any college’s ratio of applications/available slots and could seriously risk the individual’s chances at getting into any school at all.
And finally, with the increased selectivity and value (at least as described by the media) of a college education, the prices of all aspects of going to college (tuition, text books, applications, tests and prep) have gone up dramatically adding a significant economic component into the decision making process. Indicative of this is the spate of analysis on which colleges provide the highest “return on investment” (measured as future earnings of the average graduate compared to the costs of the school itself). Given that many of us feel intuitively that college should NOT be (all) about the money, it’s a confusing situation to say the least.
Using Present Value to Sort it out
And so off we went, starting in Boston and working our way down the eastern seaboard visiting towns and campuses along the way, ending up in Princeton where Adam’s grandfather went to school and where his legacy and grades just might let him consider it as a possibility.
And while Adam was gathering impressions to help him imagine his possible futures, I was thinking about the overall process and how to use Present Value to help him think through this first critical life decision that he will make (almost) all by himself.
Like most of us faced with a complex, important, noisy, and stressful situation, our first reaction was one of confusion, paralysis and a leap to the natural question of “What do we do?” instead of the more productive “What are my alternatives?” For a while we tried to ignore the situation (after all I didn’t know where to apply until I was a senior in High School), but as time went by it became clear that further delay would only make the next two years more difficult and our personal rate of discount was not high enough to make that an attractive path to pursue, and so I began to think about out how to bring the actuarial perspective to bear on this decidedly non-actuarial issue.
This space is not sufficient to fully describe how to use Present Value to choose the right school, and in any event, we ourselves have barely begun the process. However, the principles are clear and we are now well on our way through step 1 (“Clarify the Choice”), which in this case, may be the most important step in the whole process
What are the Alternatives and When do you have to Decide?
One of the first things to notice about the college application process is that it is really two different decisions that (while related) are made at different times. First you need to decide where to apply (as well as how much additional effort/cost you are willing to absorb to get in) and only then (after the applications are submitted and acceptances are received) do you get to make another decision – i.e. where to go.
I think this is an important distinction in that you can drive yourself crazy analyzing the differences between colleges, whereas the key question is where might you want to go and what would be entailed in maximizing the probability of getting accepted. To us, the really critical part of this first decision is to decide on the kind of school Adam might want to go to and what level of effort/activities he needs to pursue in the two years between now and when the acceptances will be given. The second decision of where to actually go can and should wait.
In no way am I underestimating the difficulty in making this first decision. It, in and of itself, is a hard Present Value choice. Let’s say (as is actually the case for Adam) that there are two different kinds of colleges he might want to go to ( e.g. “elite” and “fun”) and that further, within these two types there is a range of different dollar costs (e.g. “almost reasonable”, “costly” and “hideously expensive”). It will, of course be important to determine the specific schools that go into each category, but as with any decision, the important task is to imagine the consequences associated with each possible alternative and then go through the other steps of the Present Value process to actually choose among the possibilities. At the end of the day, this decision boils down to a yes/no decision on whether to apply to a (as yet unnamed) group of schools in each of the above categories.
So for Adam one of his first tasks is to imagine a path where he attends one of several “hideously expensive elite” (HEE) colleges, (including how he much he will enjoy the experience, how much he will learn, and how much he will “profit” from it post-graduation). He will then have to consider the additional extra effort he will need to put in over the next two years and the potential student loans he will be burdened by when he gets out. After he decides that (using his personal rate of discount adjusted for the possibility that he will be rejected by all of the HEE schools) this is worth it, he can then go on to determine how many (and which) of these types of schools to apply to, and much more importantly, what actions to take now (e.g study more, take SAT prep, get a part time job, join specific outside activities etc) consistent with the decision to apply to some HEE schools. The same process will go for “costly fun” schools as well as the other types.
The key conclusion here is that when you use Present Value, the important thing is to clarify and choose among the alternatives that will cause you to act differently today. Don’t make decisions today that you either might not ever face (e.g. attend Harvard vs Princeton) or decisions where you will be taking the same action regardless of the choice (e.g. applying to both Princeton and Harvard might cause you to take an SAT prep class). That will save a great deal of time and stress and make the decisions you have to make today better informed.
As the months go by and Adam’s college aspirations come into sharper focus, we will revisit how to apply the actuarial perspective to the process and discuss in more detail some of the more interesting aspects of “value”, risk, and the Present Value of the costs and benefits of a particular college career, but for now Adam’s challenge is clear; decide on which types of school he wants to apply to and take those actions that are consistent with that choice. As with Present Value in general, you need to stop, think and take one step at a time.