Mon 13 Feb 2006
People Respond to Incentives (the latest in an ongoing series)
Posted by admin under Quasi-Academic Topics
Posted at 6:20 pmIn that same vein, we apparently have a very good explanation why there are so many econ majors of late — basically, their starting salaries are 50% higher than those of “liberal arts majors”.
As noted in last semester’s post on Gender Disparities and Incentive Effects, people make decisions based on their potential options and the expectation value of those options’ outcomes.
The trend toward Econ majors (or double majors), especially compared to DivI majors, seems quite rational especially in light of the increasing financial incentives involved. This is not something that can be weeded out, at least not to a substantial extent, by the admissions process.
The way to do that would be to find a field that has a use for lots of (e.g.) English majors, that pays comparable salaries to starting Econ salaries, and has numerous employers both willing and able to pay an enormous number of non-quants such a premium salary while remaining solvent.
11 Responses to “People Respond to Incentives (the latest in an ongoing series)”
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This is wrong.
Having done and seen more than my fair share of recruiting, I can state with almost utter assurance that, with some minor caveats, being an Econ major does not increase an Eph’s chances of being hired by, say, Goldman Sachs.
Neither Goldman Sachs, nor McKinsey nor any other high paying finance or consulting firm cares if you are an economics major. Take a look at the set of courses offered by economics department. Almost none of these are meaningfully helpful for a young person starting out in consulting or finance. It is not that, say, Industrial Organization isn’t fun and fascinating. It just so happens that, as any experienced consultant can describe, it is easy to get the necessary knowledge for the case that you are working on with just a day of focused reading.
Indeed, for the most part, high-paying firms don’t care what you major is. (The obvious exception would be places like Microsoft which often only interview computer science majors.) The one major caveat is that they do not want to hire people who hate numbers and/or computers. As long as you can demonstrate (by taking a MATH/CSCI/STAT class or two) that numbers and computers are your friends, no one will care that you majored in Studio Art. In fact, if anything, you’ll have an advantage.
All else equal, majoring in economics does not improve your chances of landing a job at Goldman Sachs.
I agree that degree is not as important as that data shows, but that doesn’t mean that the students know that. Maybe it is that “A-Flag” athletes are more interested in making money, believing that an econ degree can help, and that is why they are Div II heavy, rather then looking for easy majors as some have suggested. I would love to see a breakdown of starting salary by major for Williams only, rather then colleges as a whole. I think that would be very interesting
data.
Also if the administration was interested in lowering the number of econ majors maybe they could group students in major “neighborhoods” so that they are limited to only a certain groups of majors that are assigned when they enter school. They could make each division a neighborhood and make sure there aren’t too many of X group (URM’s, “helmet sport” athletes, etc.) in each. Sounds like another plan i heard somewhere before…though I think students would be a little angrier about this one.
Williams could pay students to take undersubscribed courses of study. That approach would not foreclose them from other courses..
David, I agree with you completely that the large consulting firms tell students at their info sessions that they do not care much for major at a liberal arts school (and in fact they go out of their way to show you pictures of Religion or English majors who are working for them). However, I don’t think that most students realize this until they go to this info sessions, most likely during their senior year (or at the earliest, junior year). By this time they are already fairly well along in their major. I think it may be the perception when people are choosing their majors that having Econ will help them get one of the consulting or iBanking jobs that is contributing to the rise in Econ majors.
The one job that I would think an Econ major would be beneficial for would be the Economic consulting jobs, where in their info sessions they tended to focus more on the Economics.
If the above analysis is correct that being an econ major does not help (and all of my experience suggests that is in fact true), then perhaps a more appropriate title for Lowell’s post would be “people respond to perceived incentives.”
It sounds like there is an information asymmetry that could be cleared up with earlier career counselling (which might go against the grain of a liberal arts education).
This is a joke, right? Before we delve into information asymmetries maybe we should ask the more basic question: “haven’t econ majors always earned more?”
I suspect econ majors are more likely to choose a career in business or law to begin with. The major doesn’t make you wealthier, people who would have had high incomes by their career choices coincidentally select economics as their major.
So let’s see:
1) The incentives are more perceived than actual;
2) The perceived incentives probably haven’t changed over time, while the ranks of econ majors have grown;
3) Any differences may simply be attributable to self-selection of majors and quant courses.
It is irrefutable that people respond to incentives (why else would stores have sales or companies pay salaries?), but the surge in econ majors seems to be a poor example.
Has the number of econ major really increased over time? I remember it was one of the largest majors during the mid-90s.
I agree, for the most part, with what all of you are saying. Yes, the Goldmans and JP Morgans will just as easily hire a Poli Sci major as the would an Econ major. But if you look to the smaller market finance firms–places with fewer resources to train their new hires–you will likely notice that they are far more likely to hire Economics or quant studies majors than others.
This was made relatively clear to me as I applied for positions on smaller research desks at middle and lower-tier firms. While they stressed that being an Econ major was not a requirement, it certainly increased your chances of being hired. Many firms of this size do not have formal training programs; thus it would be far easier and less time-consuming (costly) for them to hire those that needed less instruction in economic principles to be up to speed.
Again, there are two very separate issues here: economics major qua economics major versus specific skills. No one cares if you have taken 90% of the classes in the economics major at Williams or that you are an economics major. Quantitative/computational places will care that you are, uh, quantitative/computational, but it is easier to demonstrate that by taking STAT/MATH/CSCI classes. Indeed, many quant shops look down on economics majors. (I was just having breakfast with a former intern who was recruiting for Goldman Sachs and we discussed this very point.)
The sort of “training” that major firms give you has, at most, a 10% overlap with the classes at Williams. (The biggest missing part is accounting, which is one reason I am constantly harping on the department to offer such a course — an academic one, not mere bookkeeping — outside of Winter Study.)
Now, if you are interested, specifically, in serious economics consulting than, perhaps, it is an advantage to be an economics major. But, if that is a job you are considering than you ought to take a bunch of economics classes anyway to see if you like the field enough to spend a couple years of your life at it.
Finally, a case might be made that a handful of economics courses might help one in the process. The obvious examples would include: Corporate Finance and Industrial Organization. One might also make a case for Money and Banking. A student might take one of these classes (just ignore the requirements and talk your way in) as a signal of her late blooming fascination with economics. But, again, in 99% of cases, no employer will care.
The economics courses at Williams are not designed to make you a better consultant or banker or investor. Employers recognize this fact and act accordingly.
Econ was one of the largest majors at Williams in the 1970s, too. Based on historic data that I’ve seen for some other schools, I would say that Econ has always been, and remains, a popular major at elite colleges and universities.
For example, Swarthmore publishes detailed historical data on distribution of majors (both raw numbers and percentages) in this PDF file
Econ was the second most popular major in 1981 and remains the second most popular major today — neck and neck with Bio over the time frame, swapping the #1 spot back and forth. The percentage of Econ majors has remained fairly consistent, given that just a few students change the percentages when dealing with graduating classes of 360 or so:
1981: 10.7%
1985: 12.9%
1990: 13.4%
1995: 10.8%
2000: 13.3%
2005: 12.9%
The only significant change over that time frame is that Psych has dropped in popularity; Poli Sci has grown and is now the third most popular major.
I don’t think anyone was surprised at Williams’ percentage of Econ majors prior to this year. It had been running in the 12% to 15% range, which is consistent with most top colleges. This year’s jump to 25% almost certainly caught the College by surprise.
Not sure why David wants Accounting to be taught at Williams. Williams is a liberal arts college not a pre-professional university and personally I am glad that no pre-professional courses are taught at Willliams. If people really want to understand accounting at the college level they should probably go to a undergraduate business school (Wharton, Stern etc.) Moreover, as mentioned earlier, all the major firms that recruit at Williams have strong training programs that can get recruits up-to-speed fairlyquickly. As David states, the basic pre-requisite at most of the firms on Wall Street is raw quantitative ability which can be demonstrated in most Math and some Econ classes at Williams.
A related question often asked is whether Williams grads would be at a disadvantage vis-a-vis undergraduate business school grads? Not sure if there is a definitive answer here, but from my experience most kids from Williams (and other LACs) are ranked well in their analyst classes, though their learning curve is admittedly steeper initially.