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Skin in the Game

By Chris | April 2, 2008

While grocery shopping with a friend of mine, she mentioned that she always buys the slightly more expensive eggs.  The higher price signals that the eggs are of higher quality.  If the pricey eggs are still on the market, someone must be buying them for a reason.  In unfamiliar markets consumers often use price to estimate the quality of goods.   However, in some markets price directly influences the quality of the product.  In the book Predictably Irrational, Dan Ariely discovers that patients find painkillers more effective if the pills are more expensive.  In a similar fashion, paying for your education makes you a more serious student.  Growing up, my mom repeatedly told me, “I started studying so much harder in college when I calculated how much I was paying for each lecture.”  Scholarships fully covered my own tuition and I remember thinking at times, “it’s okay if I skip this class to play frisbee golf, it is free anyway.”  Of course, I was being irrational.  My scholarships only lasted four years, and the opportunity cost of performing poorly was quite high.  Nevertheless, it is hard to deny that people care more for things they have to pay for out of pocket.  While reading one of Megan McArdle’s posts I came across the following comment:

Topics: Behavioral Economics, Economics, Education | 2 Comments »

2 Responses to “Skin in the Game”

  1. Ron Says:
    April 4th, 2008 at 6:52 pm

    Actually, the skipped classes that seemed free were really otherwise. You and I both paid for them via taxes, even in your absence. Perhaps they seemed free because the cost was borne with mostly invisible dollars, similar to the “insurance-will-cover-whatever-the-cost” experience at many health care providers.

  2. laura Says:
    April 11th, 2008 at 12:17 pm

    I do not agree that students’ different performance in school is tightly related to how much they pay.
    A. The same amount of tuition may be a heavy burden to a family, but nothing more than a number in the banking account to another. I mean even the cost matters, it should be measured relative to the family income, and I guess that ratio plays more important role in fighting against our intention to leave textbooks aside.
    B. Two of my roommates in college got loans from government in order to pay four-year tuition. But I did not see their stronger incentive to work hard. Rather, the other roommate and I were relatively more competitive. The reason, as we concluded, is we were used to the fierce competition in high school, and we kept the habbit of struggling for being the top students no matter where we are. So, how serious a student is, as far as I am concerned, depends on one’s previous experience in school and one’s study habbit cultivated from it.
    C. Your description of students at Idaho and Minnesota speaks for itself that study environment matter! If you find all peers around you work hard and care enough, you would be unconsiously influenced. More practically, you could hardly find enough companions to play frisbee with even if you want to do something for fun, because your friends may care more about how much they get in the test rather than on the court.