Tuesday, June 16, 2009

Evidence of Signaling

by Andrew Gillen

There is a long standing debate about where the considerable value that comes from a college degree comes from. One strain of thought holds that it is attributable to human capital accumulation - ie that students learn skills and knowledge in college that is valuable to employers. Another strain of thought holds that the value of a degree comes from signaling/screening. A college degree is useful not so much for what you learned while there, but as a signal to employers that you have a certain level of intelligence and persistence.

Both theories have some truth to them, though how much, I'm not sure. But I recently stumbled across something that caused me to up the weight I place on the signaling theory.

This Crimson story details how many Harvard grads went into finance over the years. HT: GM

It turns out that in 2008, 23% of Harvard graduates went into finance. Shocked by the high percent, I tracked down the figures for the number of graduates who majored in finance. That turns out to be 0.

Harvard doesn't offer a finance major. So I came up with a list of majors that were most likely to have taken some finance classes, with the percent of the class of 2008 majoring (1st or 2nd major) in parenthesis.

Finance (0%)
Business (0%)
Mathematics and Statistics (5.2%)
Economics (14.5%)

If all of these graduates choose careers in finance, that would still only be 19.4%. You could think of this as the percent of graduates that were in some way prepared for a job in finance. Of course, many of these 19.4% went into other professions. So we are looking at somewhat fewer than 19.4% that are plausibly educated for a job in finance. And yet 23% got jobs in finance.

To reconcile this with the human capital hypothesis, you'd have to think that a Harvard education is so great, that regardless of their major, Harvard graduates would be at the top of the list of employers in finance.

An alternative explanation comes from the signaling/screening hypothesis. In this case, employers in finance realize that gaining admission to, and graduating from Harvard requires an exceptional amount of intelligence. With such intelligence, graduates can quickly be taught what they need to know even if they were not exposed to many financial courses in college.

Personally, I find the second case to be much more persuasive.


capeman said...

Hasn't the Doc told you guys about all the physics majors that have gone into finance in recent years? And not just from Harvard.

And, does Harvard have minors? Are there perhaps some chemistry majors with a minor in economics?

Cowboy said...

A lot of engineers do indeed have minors in business - mine was economics. I think schools recommend that engineers have a business minor. After a meeting with the Dean of Engineering at Ohio University a year ago, I believe his philosophy and policy is that students have a minor in business. But I don't connect much with the school of engineering, so I could be wrong.