Signaling, Bundling And College

What is bundling? It’s selling more than one thing for a single price. When you buy a cup of coffee, you’re buying a cup of coffee.

But when you’re buying a cup of coffee at Starbucks, are you just paying for the coffee, or are you paying also for the air-conditioning, the Wi-Fi, the chairs and the overall ambiance? In fact, for quite a few folks who choose to work out of Starbucks, the coffee might end up being the least important of the things they’re paying for. That’s bundling.

Here’s an MRU video about the topic:

 


 

What’s signaling?

This thought experiment is borrowed from Bryan Caplan, author of the book The Case Against Education:

Take your pick: a world class education while you were/are in college, from the very best in the world in your chosen field. You get to pick your dream educators, your dream college, you get access to absolutely world class faculty, libraries, whatever. The works. But: no degree. You will never be able to show or prove your credentials to anybody. World class learning, but no proof that it took place.

OR

A certificate from whichever college and course you pick in the world. Harvard PhD? Here you go. B.Tech from the IIT of your choice? Check. But: no learning. You will never be able to attend classes and learn in that college. You’ll get the degree, but sans learning.

If you chose the latter option (I would and I do), you know what signaling is.

Here’s Wikipedia:

In contract theory, signalling (or signaling; see spelling differences) is the idea that one party (termed the agent) credibly conveys some information about itself to another party (the principal). Although signalling theory was initially developed by Michael Spence based on observed knowledge gaps between organisations and prospective employees, its intuitive nature led it to be adapted to many other domains, such as Human Resource Management, business, and financial markets.

In Michael Spence’s job-market signaling model, (potential) employees send a signal about their ability level to the employer by acquiring education credentials. The informational value of the credential comes from the fact that the employer believes the credential is positively correlated with having the greater ability and difficulty for low ability employees to obtain. Thus the credential enables the employer to reliably distinguish low ability workers from high ability workers.


 

There’s many variants of the Caplan question that are possible. For example, would you prefer to wear an original Nike T-shirt without the logo, or a fake Nike T-shirt with the logo?

If I may be permitted to veer into slightly dark territory: would you prefer to be in a happy relationship, or show that your relationship is happy?

We are, all of us, signaling all the time. Modern society wouldn’t be possible without signaling, because the cost of communicating in a world without signaling would be too high.

But education? It doth signal too much, methinks.


 

Let’s go back to bundling, and think about education. What are you buying when you enroll in a college?

If you are an optimistic sort of person (more cynical folks would call you naive), you might say you’re buying an education. If Michael Spence has made an impression on you, you might say that you’re buying the credential.

By the way, if you’ve ever asked the following question in a classroom – or even been tempted to – you’re buying the credential, not the education:

“Is this a part of the syllabus?”

And I’ve yet to meet a student (to be clear, myself included) who hasn’t asked that question.

But hey, it’s Econ101. If you’ve asked the question, you are minimizing learning. You are learning, but only to get on the path to maximize marks. Marks, I would argue, are more about credentials than they are about learning.

You’ve chosen, through your actions, signaling over learning.


 


 

The LinkedIn, Starbucks and Coursera Problem

 

  1. What is LinkedIn’s business? It’s a professional network, and as an economist, I’d argue that one of the things that it does is that it reduces the asymmetry of information. When LinkedIn allows you to “endorse” a person for a particular skill, or it allows you to post results of a test it has enabled you to take, it is allowing you to signal that you are good.
    To whom are you sending this signal? To anybody who views your profile on LinkedIn! LinkedIn is like a degree certificate from your college: you’re signaling that you know.
  2. What is Coursera’s business? It is an online service that gives you access to recorded lectures that you can listen/see on your own time. These lectures are recorded by world-class faculty, so the learning is as good as it can get. Coursera is like a classroom (but arguably a much better one) from your college: you’re learning.
  3. What is Starbuck’s business? Selling coffee? Sure, you could argue that, but it’s more than that. Remember, you’re buying a bundle at Starbucks! Starbucks’ business is providing an environment that allows people to work in a social setting. To work, to network, to relax, to converse – but what it sells you is comfortable environs where you can do what you want to. Starbucks is like the setting in the college but outside the classroom: it’s your peer environment where you can get work done.

 

Now, the problem of education: when you buy a degree from college, you’re getting all three things.

College is a bundle: education | credentialing | peer networks

 


 

LinkedIn Starbucks Coursera
All logos belong to the firm in question

 

And the reason colleges haven’t gone away yet – and won’t, anytime soon – is because there is no business that I am aware of that sits at the center of that triangle as comfortably as college does.

 


 

Nowadays, it is almost platitudinous to say that the educational system is broken. Why, Peter Thiel cites it as an example of thinking that is not contrarian in his book, From Zero to One.

But here’s the thing:

College isn’t broken.

A Coursera course isn’t enough to land you a job these days: fact.

Most of us value, and almost always will value, the friends we make in college: fact.

The college still is the best place to go to to get both of these things together at the most reasonable price.

But:

Learning is broken in colleges today: fact.

 


If you want to go up against college as a business, you need to sell the same thing that college is selling. And the college sells you a bundle.

A business that seeks to do better than college must do better on all three counts, not just on learning. All of the online learning businesses – Coursera is just one very good example – aren’t able to fill all of the three vertices just yet.

And that’s why education hasn’t been truly shaken down by the internet just yet:

Because college today is more about signaling than it is about learning, and because when you pay money to a college, you are getting a bundle.

So what to do? How to solve this problem?

In the next post in this series, we’ll see what other folks who’ve chosen to battle this beast are trying to achieve.

 

1917, Value in Use and Value in Exchange

It is one of the first concepts to be taught in introductory economics – or it ought to be, at any rate. Value in use, and value in exchange, that is.

The concepts simply mean that any particular thing – “good”, as we economists call it – has potential value either because we use it, or because we are able to sell it. Water, the canonical example, has clear value in use, but as a general rule, not that much value in exchange. That’s debatable, but we’ll move on for now.

You can either consume a good, or sell a good to buy other goods. The first is value in use, and the latter is value in exchange.

Here is a short explainer.


 

One of the most powerful movies I saw this year was 1917. For those of you who haven’t seen it yet, it shows you a slice – and a rather uncomfortable one – of what life was like during the Great War, or WWI. Read the review I’ve linked to, but also please watch the movie.


 

What do the two things I’ve spoken about have to do with one another?

In the movie 1917, the two protagonists are talking about a medal that one of them received for bravery. The recipient speaks about how he sold it for a bottle of wine.

I can’t find a clip of this on YouTube at the moment, but here’s a description of the scene from Vulture.com:

“After they cross through the German trenches — a sequence that starts with the men staring at bags of shit and only gets more harrowing from there — Blake and Schofield arrive in the open countryside. It’s a view not often seen in World War I movies, which rarely venture beyond the trenches, and it provides an opportunity for the film to slow down and relax. The soldiers get into a debate about whether there’s any meaning to be found in the war. Blake, who, true to his name, is the romantic of the pair, has learned that Schofield traded his Somme medal for a bottle of wine, and berates him. “You should have taken it home,” Blake says. “You should have given it to your family. Men have died for that. If I’d got a medal I’d take it back home. Why didn’t you take it home?”

Schofield disagrees, with the bitterness of a war poet: “Look, it’s just a bit of bloody tin. It doesn’t make you special. It doesn’t make any difference to anyone.””

That excerpt is from an email I sent to Amit Varma. It was meant to be a pitch for a series that used to run on a website called ThinkPragati (no longer up and running as a magazine, alas). The series was called Housefull Economics, and it seems as if I ended up writing the last column to appear in that space.

But what can’t be written there can be written here! That clip, the one that is described in the excerpt above, is a great way to think about value-in-use and value-in-exchange. Of what use is a piece of metal to Schofield? In war torn France, no use at all – in use.

But in exchange? Why, it got him a bottle of wine!


 

There is another concept at play over here, that of signaling. Blake is clearly horrified at the idea that something as valuable as a medal could be exchanged for something as trivial (to him) as a bottle of wine. Blake is effectively saying that sure, there may not be much value-in-use of the medal right now, but it has tremendous value in terms of signaling.

About which we shall speak a lot more on the coming Thursday, for signaling is a very fascinating topic indeed. But in the meantime, please do read the rest of the columns from the Housefull Economics series – they’re a great way to learn about economics!