24 January 2012

Weak Signals Cost More

Heartiste takes a break from explaining women to explain the college bubble:
In 1971, the Supreme Court ruled in Griggs v. Duke Power Co., in the first and most famous of the disparate impact theory cases, that the use of broad-based aptitude tests in hiring practices was a violation of Title VII of the Civil Rights Act. Around 1978, college tuition costs began to skyrocket, and haven’t let up since.
Foseti says that Charles Murray says that colleges are primarily used for their sorting function, not their signaling function.  Therefore, it should be reasonable to see college prices increase since, by the elimination of aptitude tests, there are now fewer ways of sorting people by their cognitive abilities (Econ 101 refresher:  stagnant or increasing demand coupled with lower supply leads to higher prices).

Distinguishing between sorting and signaling in this context is simply silly since both theories have the same practical outcomes.  But more than that, signaling theory already accounts for the elimination aptitude tests.

According to signaling theory, aptitude tests are direct signals.*  Direct signals, in general, are pretty cheap because they are high-risk, insofar as you cannot ever really deny their meaning.  Indirect signals, on the other hand, tend to be high cost because they are low-risk, insofar as these signals generally include a healthy dose of plausible deniability.  Banning aptitude tests, and therefore direct signals, pushes people to enter a market filled with more indirect signals.

Recall that indirect signals are expensive to begin with.  College is generally more expensive than an aptitude test, in terms of time, money, etc.  If demand for an already expensive product increases, it stands to reason that the price of the product will go even higher.  As such, signaling theory is in perfect concert with both sorting theory and reality, and there does not seem to be any need to differentiate between signaling theory and sorting theory.

Also, in closing, note that the recent ban on unpaid internships will help fuel the college bubble because another cheaper signaling market is closed down.  Instead of working for free for a couple of years to prove one’s aptitude, one will now have to go to college to get ahead.

* In signaling theory, there is a continuum of signal directness.  A girl getting naked right in front of you, for example, is directly signaling that she is attracted to you.  A girl nervously playing with her hair when you’re talking to her is indirectly signaling that she’s attracted to you.

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