University: Is it worth it?

Next year, university students will have to pay £9000 a year for tuition, but is this fair and is it still beneficial to go to university?

Uni as an investment

Despite the tripling of fees, university still adds up as a good investment. By the time you are 43 you would have earned more than someone who only completed their A levels, even though they had a three year head start (see below)*.

However, if you were to take a gap year and choose a low earning degree (art, music, media studies etc) then it simply doesn’t become a worthwhile investment.

Recently the amount the average graduate earns over their lifetime has narrowed when compared to that of a non-graduate. The reason is a simple case of supply and demand. A sluggish economy means subdued demand, plus an ever increasing amount of graduates desperate for a job means that the wage they can command will be less.

Recently there has been a strong increase in the amount of graduates applying to science, maths, medicine and of course, economics. This is because such subjects not only improve the chance of graduates being employed but also the wage they will have when they find employment. This is a direct result of recent increases in the cost of attending university.   

Fairness

Many of the recent protests regarding the increase in tuition fees are quite understandable. These students will be paying 3 times more for their degree than the previous year. It doesn’t sound very fair. But actually the tax payer has had the unfair deal for the last few decades.

Before the cuts the government would spend £7.2bn on universities, that’s £272 per household per year. When you consider that the primary beneficiaries of that money are the students themselves, it’s quite a lot. Effectively what you have is the less well off being taxed to pay for the future rich students. Certainly there are a lot of social benefits from having a more educated workforce and universities should receive subsidises from the government. However, when the student takes on so little of the cost, the result is inequitable and a waste of resources, especially when the costs go on a course which will provide little benefit to anyone.

You should go!

For students that have carefully considered their course, are self motivated and determined, university is definitely worth it. The above graph only shows the tangible financial benefit, but going to university has so many other benefits. For example living with other young, like minded people is very liberating and a lot of fun. All of those experiences at university that you cannot count certainly add value to to going.  Any graduate will tell you that the happiest days of their life were those spent at university.

* The cumulative earnings are linear as they are based on average earnings, therefore, form the data based on the graph, you cannot judge the time at which a degree would surpass the earnings of A levels

The Lottery: 99.999999% certain it’s not going to be you

You’ve seen it in the news, all your friends are talking about it, the Euro millions jackpot is over £150m. You start to imagine what it would be like winning all that money; houses, cars, yachts and planes fill your mind. You don’t care what the odds of winning are, some has to win it and as Camelot says “it could be you!”

 Sound familiar? Then you have a classical case of probability blindness.

The human brain is not really wired to calculate things. It has evolved to catch prey, grow crops and generally make living easier. So when the chance of all up wildest dreams coming true is up for grabs the smart part of the human brain shuts down. For example take this simple maths question, which you are going to get wrong.

A bat and a ball cost £1.10 in total. The bat costs £1 more than the ball. How much does the ball cost?

Got the answer?

Even though I forewarned you about your error, you still think the answer is 10p. Don’t feel too bad, almost everyone answers this question wrong. The reason being is the brain sometimes jumps to the answer without reviewing the calculation. We often have to force ourselves to do the calculation.

So, if the ball costs 10p and the bat is £1 more, then bat is £1.10 which totals £1.20. But if the ball cost 5p and the bat is £1 more then the bat is £1.05 totalling £1.10. Not rocket science, but we have to force ourselves to do the calculation and it is the same case with the lottery. The brain thinks “there is a chance of winning £150m, the ticket only costs £2 - it’s a good deal”. We have to stop ourselves becoming emotional about the lottery, stop ourselves imagining what it would be like to win and start thinking about why we are throwing away £2 every week?

To help break through this irrationality you can use a simple tool, Expected Monetary Value (EMV), which is the probability of winning times the winning amount.

EMV

To know weather your ticket is good value or not, first you must consider the odds of winning.

To calculate this, you take the odds of guessing a single number correctly, that is 1 in 50. Guessing the next ball is slightly easier since one ball has been removed. So 1 in (50 x 49). You will need to match 5 numbers. But you don’t need to match them in any order, so you divide by the number of permutations factorial (5x4x3x2x1).

So far we have (50x49x48x47x46) / (5x4x3x2x1) = 2.1million to one

Not bad you might think, but in the Euro millions they add another set of numbers, ironically called ‘Lucky Stars’. Here you have to guess another two numbers from a pool of numbers. So an additional (11x10) / (2x1) = 55 but we are not adding we are multiplying (55x2.1milion) = 1 in 116.5million!!!!!

But the jackpot could be massive; a few weeks ago it was £166m (which it was capped to)! So is it worth it?

The EMV is the probability of wining (in decimal form) times the winning value. If the EMV is lower than the cost of the ticket, it is not a good investment.

EMV = (1/116.5million) x £166million = £1.42

The ticket cost if £2.

There are of course other prizes to be one, (not that you really care about those), if we included those it only increases the EMV to £1.80.

So the highest ever jackpot for Euro millions was still not worth buying.

There was one case where a ticket was worth buying. In 1992 some Australian investors noticed that the Virginia state lottery had an EMV of $3.95 when the ticket only cost $1.   So they quickly found 2500 investors, investing $3000 each and set about buying every possible combination of tickets. The problem they had was trying to them all in a week (they had to buy over 7 million tickets). They hired 125 people to fill out the tickets manually in stores across Virginia, but it wasn’t enough. By the time the draw went ahead the investors had only 60% of all possible combinations.  They also had another fear, what if they had to share their jackpot? In both cases the investors were massively exposed to a big loss. They watched the draw nervously, to their delight there was only one winner and it was them.

Ambition Depressor

On a concluding note, the lottery is only £2, it’s not a massive amount of money to throw away, but I do have concerns that the lottery inhibits ambition. Dale Carnegie, author of How to Win Friends and Influence people writes that one of the main hungers we have is for ‘money and things that money buys’, in other words ambition. Ambition however can be satisfied without actually encountering the money, so long as you’re moving in the right direction. For example when looking for a new job you have an ambition to move on, a hunger, but when you send off your CV to a company you feel satisfied that you are moving in the right direction. For people buying lottery tickets, I believe the hunger for ambition is being satisfied, even though there is practically no chance of winning. How many times have you herd someone who is unhappy with their job or in a bit of financial trouble part jokingly say “I’m hoping to win the lottery”? 

If everyone stopped buying lottery tickets, stopped fanaticising about the event which will never happen and instead focused on practical ways of improving their life, 99.999999% of people would be a lot better off.

Economics of Rioting

The mass riots across our green and pleasant land have left many with a sense of disbelief and shock. The reasons behind what occurred are long and complex and most are beyond the scope of this blog, but there are some aspects that can be explained by simple economics. 

How it Started

Like many previous mass riots, the spark is usually related to race. Many young black men feel that they are discriminated against. They feel that the government and the institutions it supports are prejudiced against them. And to be fair, they have a point.

If you’re black you are 8 times more likely to be stopped and searched by police than a white person. Jermain Defoe had to get a restraining order so that Essex police stopped pulling him over ever time he drove around Essex. David Starkey, a respected Historian with a TV series on the BBC, has recently spoken on an interview regarding the riots saying “the whites have become black” as if they have caught some sort of criminal disease. So when a man was killed by police in suspicious circumstances, for the young black people of Tottenham this was a tipping point of outrage.  

The riots were intensified with false rumours sent around via Blackberry messenger saying that other black man had been killed by police, and soon similar protests erupted around London. The police gave the rioters some space, understanding that a full blown confrontation could exacerbate the situation. However neither they, nor anyone else expected the onslaught of the opportunist looter. 

The Rational Looter

When the riots in Tottenham had reached a critical mass the opportunists suddenly gained an incentive to riot.

Consider this,

Cost = Probability of being caught x Cost of being caught (including social costs)

Benefit = value of probable haul + value of emotional thrill

For most of us the cost of being caught would be horrific. We would lose our jobs, our friends and any value we appoint to our social standing. For the young, unemployed and low paid, this cost is significantly lower. They also value the haul more than we would. Many of the young crowd involved use their branded clothes, watches etc as a way of showing social status. Thirdly, many of the rioters were teenagers, who are generally emotionally volatile anyway, would find looting a greater thrill than the more mature civilian.

Generally however, a looter is no different from you or I. They will consider the benefits and costs and make a rational decision. When the police held back on engaging the rioters at first, it created an interesting affect on their cost calculations.

If we expand on the ‘Probability of being caught’, we can gain an insight into the mind of a looter.

Probability of being caught  =  (Number of police x  arrest % per officer) / Number of rioters

Before the riot we could assume to see something like this (300 * 80%)/400 = 60%

We assume a 60 % chance of being caught would not make looting a worthwhile (60% x Cost of being caught is grater than the benefit). But when the police initially held back from the rioters, the arrest % fell to a low figure say 20%.

(300 * 20%)/400 = 15%

Now looting becomes a little more attractive.

Potential looters will assign different levels of value to the haul and to the thrill of rioting, but as the number of looters increase, the probability of being caught falls. This means more and more will find looting attractive.  Imagine a 200 increase in the number of looters.

(300* 20%)/600 = 10%

This is a chain reaction, the more people start rioting the more that will find it attractive. A spiral will start with an ever falling probability of being caught. Looking at the overall cost Benefit analysis then looting becomes completely rational.

The reader might think, “I would never steal, even if the benefits outweigh the costs”. Ask yourself; have you downloaded any songs that you have not paid for? Any DVDs that are not entirely legitimate? When you stole the music or the brought the illegal DVD you did the exact same Cost-Benefit analysis as the looters.

If the government wanted to stop wide spread looting in the future it should do the following.

1. Make sure that either police numbers are high or arrest rates are high (preferably both)
2. Increase the cost of being caught, with stiffer sentences and larger fines.
3. Increase the value that young people assign to their community. Currently in large cities the value young people assign is small.

Obviously there are lots of things to discuss here; I would love to hear your thoughts on the riots so please comment below.