Reflection on The Why Axis: the Role of Time Discounting in the Education Gap.

Two eeks ago I wrote about chapter 4 of The Why Axis. I hope you continue (or begin) to read along with us as we make our way through the book and enjoy it as much as we are! The authors do a great job relaying some tricky behavioral economic ideas while they tackle profound topics in a fun way.

One such topic, the gap in childhood education between inner city kids and many wealthy even simply middle class kids, was central in the fourth chapter. I found Gneezy’s and List’s discussion provoking and I have given some thought to a couple issues they raised. There are two things I want to discuss, the first of which is the object of this post.

In their studies the authors found that monetary incentives greatly increased students’ performance in school and on standardized tests. This is an encouraging result but it made me think if monetary incentives drastically improve the scores of poor students then why do wealthy students not need them do well?

First of all, I should mention it’s quite possible that students who come from well-off households receive monetary compensation for the school performance. Having gone to school in a fairly affluent environment in elementary school, I remember kids who would literally get paid by their parents for good grades. It’s not hard to remember that this strongly incentivized them to do better and so it came as no surprise to me when I read about Gneezy’s and List’s study.

Having said this, there are many kids who are not paid yet perform excellently in school. Innate motivation levels, intelligence, concentration ability, and whatever else is conducive to success in school aside (ceteris paribus), I would suggest that kids who grow up in fairly well off to very well off households are more likely to view school as a path to future success than kids who don’t.

Yes, no groundbreaking proclamation here, this is part of the intuition for why wealthy students perform much better in school than poor students. However, I think this deserves a look through the lens of time discounting.

Time discounting is the idea that people prefer rewards that arrive sooner rather than those that arrive later and so they discount the value of a later reward by a factor of the amount of time the reward is delayed.** (interesting aside below)

From the time they are of schooling age, or even earlier, children who grow up in educated households learn to attribute riches with school. Even if they aren’t receiving literal compensation for their performance, they are still capable of intuitively monetizing their performance, i.e placing a monetary value on their performance by understanding good performance now, equals wealth later.

In a brash sense, you can think of them as little economists, understanding the delicate trade-offs between studying hard and deciding not to, and the incentives to do well in school. And in their economics brains, they place a high enough value on wealth later in life to try to do well in school.

Contrast this with poor inner city children.

Though they very well may understand that their unfortunate living standards are related to a lack of school for their parents, it would be illogical to assume this means they necessarily correlate a better life to success in school, especially when role models for most young children are celebrities: athletes, singers, actors, and even maybe famous entrepreneurs (no safe way to make a living) rather than Nobel Laureates, academics, or famous scientists (save Bill Nye).

So they discount the future reward of wealth accrued by attending school (not wealth accrued in some other way) more than affluent kids because they have very little evidence to suggest that school allows you to accrue wealth.

Their hardworking but unfortunately uneducated parents can tell them that school will lead to a better life, but with a lack of evidence to support their claims, why should kids delay the instant gratification of not studying for the delayed gratification of something that will probably never come anyway?

What to do about all this? I am not quite sure, but it’s worth thinking about the way a child’s environment may shape her internal discounting mechanisms, creating mental discounting curves that nudge them towards either  instant or delayed gratification.

**It’s also intriguing to point out that perhaps hyperbolic discounting has something to do with all this.

Hyperbolic discounting is the behavioral idea that we do not appropriately discount rewards according to length of delay. Instead, experiments have shown that people systematically discount delayed rewards too much, that is they under value future rewards to those that will come later by a factor that is time-inconsistent.

For example, if I prefer 1 dollar today to 2 dollars in a week, yet prefer 2 dollars in 10 weeks to 1 dollar in 9 weeks, I am hyperbolically discounting the value of a dollar. Though the time between receiving the awards does not change, my preference for one reward over the other does.

Though it is difficult to apply hyperbolic discounting in this scenario because kids aren’t making a decision between receiving less of something now (money) versus more of the same thing later, rather deciding between two things now (studying v not studying) in order to receive or not receive something later (money), I believe there nevertheless may be an application of hyperbolic discounting somewhere in this framework.

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