WIP

Education loans and bankruptcy... a new chapter?

I've been giving some thought to the problem of the education bubble.

I start with the assumption that everyone recognizes that there is a bubble in higher education.  There has been a clearly unsustainable expansion in the size, amenities and expense associated with a bachelors degree over the last decade or so.  Alongside there has been an explosion in student debt.

Unlike just about every other form of debt (except those associated with child support), student debt cannot be expunged during bankruptcy.  This situation exists to predict lenders from the graduate freeloader scenario.  In this scenario, a student attends as much school as possible and pays for it all (including living expenses, semesters abroad, etc.) with loans.  The graduate freeloader loads up as much debt as possible and then declares bankruptcy immediately upon graduation.  The student walks away with a great experience, a valuable degree and a mere five years of moderate financial inconvenience.

Nobody likes the concept of the graduate freeloader.

Leaving behind for a moment the rate of incidence of the graduate freeloader problem (I have no data one way or the other), let's assume it is a real problem and one that we really need to prevent.  

One way that lenders protect themselves is through collateral.  If the borrower defaults on the loan, the lender collects the collateral.  This is how mortgages work, and we generally presume that the burden of due diligence for this sort of loan rests with the lenders.  It is the lender's obligation to ensure that the collateral backing the loan (on a risk adjusted basis) is sufficient to cover the loan in the event of default.  This is part of why none of us had much sympathy for the mortgage industry when their preposterous lending activities during the real estate bubble led to serious financial problems for the banks.  It was the duty of the banks and the mortgage brokers to vet the quality of the loans, not really the duty of the borrows to do that for them.

I propose that a similar arrangement should exist for student loans.  I believe that borrowers should have an extra bankruptcy chapter... call it "Chapter 16" or something.  Chapter 16 would be the most complete form of bankruptcy... after liquidation of all other assets to satisfy senior creditors, the filer would also have to surrender his/her credentials as well.  Although this is only metaphorical as collateral from the liquidation perspective of the lender, it would serve a very similar role from the perspective of the borrower.

Chapter 16 would address the graduate freeloader problem too, as long as banks weren't extending credit to students for things other than the pursuit of their degree or for superfluous nonsense degrees.  One could argue "But what 21 year old kid will care if they can't pay their loan and they have to give up their degree in comparative medieval literature, especially after spending 3 semesters in Spain on the bank's dollar?"

I think that's a great argument, and exactly the one that the bank should be considering before it extends the 18 year old kid (who will become that 21 year old kid) $140,000 to do that.

Andre

decomposing problems

(...and by that I don't mean necrotising fasciitis or "flesh eating bacteria"... that's a decomposing problem too, but not one that I want to talk about.)

Still slogging through the "Thinking Fast and Slow" audiobook during my drive.  This morning Danny was on the topic of decomposing problems correctly.  In other words, he was talking about setting the frame.
He uses an example of an economist who asked his friend "would you accept a coin-flip bet.  If the coin comes up heads, you win $200.  If it comes up tails, you lose $100."

A rational actor would jump all over it, but his friend (a human and therefore not completely rational) responded "no, because I would emotionally suffer from the loss of $100 far more accutely than I would emotionally enjoy the gain of $200."  His friend then added "however, if you were willing to make 100 such bets, I'll take you up on it".

Danny goes on to explain a theoretical foundation based on prospect and utility theory for why this adds up to make sense based on the relative loss-aversion and personal utility of winning and losing money.  In really simple terms, when you work out the numbers:

1. one coin flip on this bet you have a 50-50 chance of losing money
2. two coin flips, you have a 25% chance of losing money
3. three coin flips, you have a 12.5% chance of losing money
4. and so on. 

The real point is that framing matters.  We often make the mistake of taking big, complicated analytical problems and breaking them up into SDs and sending special teams off to work specific parts of the problem.  They report back one at a time with their answer, but the questions were framed too narrowly and the sum of the answers to the individual questions may not add up to the right answer for the big problem.

In the case of the coin flip from above, we could take the portfolio of 100 bets and say "whoa, this is too complicated" and pick 100 teams and tell each them to go work the numbers.  Each would come back and say "don't make the bet" and the leader, who invested much effort from his org, would rationally say "do none of this stuff" and reject the whole portfolio.  That would be a mistake.

I don't have data to support it, but I think this is, in large part, why large companies often fail to take advantage of the many good, small ideas that crop up.  We have many, many of these small bets that we could be taking.  Each of them has a potential for a big win but is more likely to lose.  We feel the losses more accutely than the hypothetical wins.  For that matter, we suffer the investment more than the excitement of the possible win.  One-at-a-time, we kill these ideas, without ever looking at the whole portfolio.

thinking slow and slower

I'm reading Danny Kahneman's book "Thinking Fast and Slow".  It is definitely a good read and worthwhile for just about anyone.  It is especially important for people who make large, infrequent decisions with slow time to feedback.

I just have to point out one comical inconsistency in the book... it sort of proves that Kahneman himself is prone to mixed thinking.

Early in the book he talks about regression to the mean, or what is also sometimes called "mean reversion".  The central concept of regression to the mean is that there is a mixture of skill and luck in any outcome.  Holding skill relatively constant from contest to contest or trial to trial or decision to decision, that leaves luck as the big difference from one chance to the next.  If somebody just had a great outcome, it was very likely that they were lucky on that outcome.  Just playing the odds, that means it's also very likely that they will do worse on the next outcome.  The reverse applies for bad outcomes.

He then tells a great story about a flight instructor, that you can find anywhere if you're interested.  He also cautions the reader not to build a plausible, explanatory and causal story to explain the shift in performance.  He beats up on sports-casters, experts of all kinds and so on for building up a story to explain why high-performers often do less well after a spectacular success.

A few chapters later in the book, he starts talking about optimists. He spends a while talking about the benefits and dangers of optimism.  He talks for a while about how award-winning CEOs tend to lead their companies to underperform the market.  He builds a plausible, causal story about how the over-confidence of CEOs that have done well leads them to make overconfident decisions, such as acquisitions and extreme risk-taking behaviors.  His story sounds a lot like the sort of story he was lambasting earlier for sports stars.
:)

thinking fast and slow

Reading Kahneman's book about type 1 and type 2 thinking, or precognitive v. cognitive, subconscious v. conscious, id v. superego, automatic v. reflective etc. etc.

It's definitely a concept that has been around for a long time in various fields, but fun to read about.  The brain primarily operates based on habits and perceived patterns.  At the same time, what we think of as our consciousness is essentially a focused self-reflection on some portion of that boiling churn.  Certain things are pushed up from the subconscious for more careful reflection; things that stand out as abnormal or that require mental processing that can't be done from habit (such as complicated math).

Kahneman's theory is that easy problems are best solved with automatic thinking, hard problems are best solved through deliberate thinking and that we have to be careful about it.  He also has a great sentence, something like:
"When faced with hard problems, we often solve an easier problem instead, and are unaware of the substitution"

viral campaign from Intel

http://ultrabooktemptations.intel.com/

cute little viral campaign for the ultrabooks from Intel.

Lateness is a minor act of contempt

It doesn't take much to plan ahead and ensure that you're on time.
It takes even less to watch the clock and keep your committments.
When someone shows up late it sends a clear message: "Whatever I was doing was clearly more important that whatever else you could be doing with this time."

That is an act of contempt.
It's why we all hate waiting rooms!