Our approach educating ourselves and our children has numerous examples of misaligned incentives that create rising costs, hard to value returns, and a persistence traditional approaches in the face of more efficient and effective alternatives.
Further study of incentive design can help raise awareness, quantify the impacts and costs of the misaligned incentives, and offer ways to create better systems.
Education is one of many sectors that can be transformed; see our vision for more.
It’s no secret that the price of college tuition has soared over the past few decades. The US Bureau of Labor Statistics estimates that tuition has risen 1,483% since 1977 — nearly double the rate of inflation. There may be several valid explanations for this trend, but among the factors to examine are the system incentives driving the schools. For example:
- Ironically, most of the value we attribute to university is their selection of students and not the education they provide. Completing a college degree takes four years and over $100k, and yet most of the value that comes from the degree is having gotten into the school in the first place. Why is the value to time spent ratio so inefficient?
- Schools with large endowments must maintain a tax exempt status to avoid paying taxes. To do so, they need to show that ~50% of their student body receive financial aid. And the best way to ensure that 50% of the class needs financial aid it to raise tuition beyond what most can afford.
- Legacy admissions practices mean that schools are more likely to grant access to children of alumni, and especially of those alumni who donate money. Generally understood but rarely acknowledged, the further off of the “target profile” of a potential legacy admit, the more money the parents are expected to donate for their child to be accepted.
- In a perverse feedback cycle, the high cost of education creates an agency problem that further drives costs up. Federal student loans have become such common practice that they now are nearly expected. But introducing this third party payer increases people’s willingness and ability to pay.
Providing incentives for young students to learn can be a big challenge. The famous marshmallow test showed how difficult delayed gratification can be, and primary education requires faith in a return that can be 10+ years in the future. Primary education does a poor job articulating its value to the students, leading to drop-outs and an under-investment from students. How much human potential could be gained through better articulated and expressed incentives to excel at school?
Unfortunately, we seem to be moving in the opposite direction.
Among the most pioneering ways to align student and institutional incentives are Income Sharing Agreements, first introduced by Lambda Schools (now Bloom). ISAs provide access to education for low-income students by allowing the student to get their degree with no payments up front, and to pay the school only to the extent that they are successful in the job market.
Interestingly, California struck down a key student protection that limited the payback responsibility to a maximum of two years, which forces students to pay back the full amount — regardless of whether they are getting a return on their education! This innovative financial instrument has thus been to function more like a traditional student loan.
What are the odds that the teacher at the head of yours or your child’s classroom is the best in the world at introducing a concept? Very low.
With thousands of hours of expert video instruction available, it seems so obvious that a “flipped classroom” — where a student can watch a lecture at their own pace and we leverage the teacher’s in-person to handle questions and provide the encouragement and emotional support conducive to learning — should succeed.
Certainly there are some benefits to the traditional lecture style — maybe for some it holds their attention better — but better understanding and crafting of incentives likely can help shift away from legacy effects and help us to find more efficient and effective approaches.
Employers so often look at the university one attended as a proxy for intelligence or aptitude. Yet where you went to school says more about who you were in high school than who you are today. And more about how you performed when you were 16 years old than what you learned in college.
Can we develop proxies for performance that better align employers’ incentive to find great candidates while not relying so heavily on measures weighted by youth?
Elite institutions likely could educate many more students than they currently do, while maintaining their current quality standards. They certainly have many more well-qualified applicants. However, maintaining the exclusivity of the degree keeps its status and value high — something that’s important to the university and likely to its alumni as well. This creates a strong incentive to keep graduating class sizes small and prices high.
Accrediting agencies in the US play the role of deciding what new educational programs can be considered “degree-granting institutions.” Those agencies have an important role to ensure quality standards. However, because they consist predominantly of representatives from existing universities, they also have incentives to restrict competition and to make the process as difficult and drawn-out as possible.