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Seth_Goldin comments on Open Thread: June 2010 - Less Wrong
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Thought I might pass this along and file it under "failure of rationality". Sadly, this kind of thing is increasingly common -- getting deep in education debt, but not having increased earning power to service the debt, even with a degree from a respected university.
Summary: Cortney Munna, 26, went $100K into debt to get worthless degrees and is deferring payment even longer, making interest pile up further. She works in an unrelated area (photography) for $22/hour, and it doesn't sound like she has a lot of job security.
We don't find out until the end of the article that her degrees are in women's studies and religious studies.
There are much better ways to spend $100K. Twentysomethings like her are filling up the workforce. I'm worried about the future implications.
I thank my lucky stars I'm not in such a position (in the respects listed in the article -- Munna's probably better off in other respects). I didn't handle college planning as well as I could have, and I regret it to this day. But at least I didn't go deep into debt for a worthless degree.
Do you mean young people with unrepayable college debt, or young people with unrepayable debt for degrees which were totally unlikely to be of any use?
What's the substantive difference? In both cases, the young person has taken out a debt intended to amplify earnings by more than the debt costs, but that isn't going to happen. What does it matter whether the degree was of "any use" or not? What matters is whether it was enough use to cover the debt, not simply if there exist some gain in earnings due to the debt (which there probably is, though only via signaling, not direct enhancement of human capital).
I was making a distinction between extreme bad judgment (as shown in the article) and moderately bad judgment and/or bad luck.
Your emphasis upthread seemed to be on how foolish that woman and her family were.
Arnold Kling has some thoughts about the plight of the unskilled college grad.
1 2
Thanks for the links, I had missed those.
I agree with his broad points, but on many issues, I notice he often perceives a world that I don't seem to live in. For example, he says that people who can simply communicate in clear English and think clearly are in such short supply that he'd hire someone or take them on as a grad student simply for meeting that, while I haven't noticed the demand for my labor (as someone well above and beyond that) being like what that kind of shortage would imply.
Second, he seems to have this belief that the consumer credit scoring system can do no wrong. Back when I was unable to get a mortgage at prime rates due to lacking credit history despite being an ideal candidate [1], he claimed that the refusals were completely justified because I must have been irresponsible with credit (despite not having borrowed...), and he has no reason to believe my self-serving story ... even after I offered to send him my credit report and the refusals!
[1] I had no other debts, no dependents, no bad incidents on my credit report, stable work history from the largest private employer in the area, and the mortgage would be for less than 2x my income and have less than 1/6 of my gross in monthly payments. Yeah, real subprime borrower there...
One reason why the behavior of corporations and other large organizations often seems so irrational from an ordinary person's perspective is that they operate in a legal minefield. Dodging the constant threats of lawsuits and regulatory penalties while still managing to do productive work and turn a profit can require policies that would make no sense at all without these artificially imposed constraints. This frequently comes off as sheer irrationality to common people, who tend to imagine that big businesses operate under a far more laissez-faire regime than they actually do.
Moreover, there is the problem of diseconomies of scale. Ordinary common-sense decision criteria -- such as e.g. looking at your life history as you describe it and concluding that, given these facts, you're likely to be a responsible borrower -- often don't scale beyond individuals and small groups. In a very large organization, decision criteria must instead be bureaucratic and formalized in a way that can be, with reasonable cost, brought under tight control to avoid widespread misbehavior. For this reason, scalable bureaucratic decision-making rules must be clear, simple, and based on strictly defined categories of easily verifiable evidence. They will inevitably end up producing at least some decisions that common-sense prudence would recognize as silly, but that's the cost of scalability.
Also, it should be noted that these two reasons are not independent. Consistent adherence to formalized bureaucratic decision-making procedures is also a powerful defense against predatory plaintiffs and regulators. If a company can produce papers with clearly spelled out rules for micromanaging its business at each level, and these rules are per se consistent with the tangle of regulations that apply to it and don't give any grounds for lawsuits, it's much more likely to get off cheaply than if its employees are given broad latitude for common-sense decision-making.
As nearly as I can figure it, people who rely on credit ratings mostly want to avoid loss, but aren't very concerned about missing chances to make good loans.
For what it's worth, the credit score system makes a lot more sense when you realize it's not about evaluating "this person's ability to repay debt", but rather "expected profit for lending this person money at interest".
Someone who avoids carrying debt (e.g., paying interest) is not a good revenue source any more than someone who fails to pay entirely. The ideal lendee is someone who reliably and consistently makes payment with a maximal interest/principal ratio.
This is another one of those Hanson-esque "X is not about X-ing" things.
I think there's also some Conservation of Thought (1) involved-- if you have a credit history to be looked at, there are Actual! Records!. If someone is just solvent and reliable and has a good job, then you have to evaluate that.
There may also be a weirdness factor if relatively few people have no debt history.
(1) Seeing Like a State: How Certain Schemes to Improve the Human Condition Have Failed is partly about how a lot of what looks like tyranny when you're on the receiving end of it is motivated by the people in charge's desire to simplify your behavior enough to keep track of you and control you.
Simplifying my behavior enough to keep track of me and control me is tyranny.
Except that there are records (history of paying bills, rent), it's just that the lenders won't look at them.
Maybe financial gurus should think about that before they say "stay away from credit cards entirely". It should be "You MUST get a credit card, but pay the balance." (This is another case of addictive stuff that can't addict me.)
(Please, don't bother with advice, the problem has since been solved; credit unions are run by non-idiots, it seems, and don't make the above lender errors.)
ETA: Sorry for the snarky tone; your points are valid, I just disagree about their applicability to this specific situation.
SilasBarta:
Well, is it really possible that lenders are so stupid that they're missing profit opportunities because such straightforward ideas don't occur to them? I would say that lacking insider information on the way they do business, the rational conclusion would be that, for whatever reasons, either they are not permitted to use these criteria, or these criteria would not be so good after all if applied on a large scale.
(See my above comment for an elaboration on this topic.)
Or maybe the reason is that credit unions are operating under different legal constraints and, being smaller, they can afford to use less tightly formalized decision-making rules?
No, they do require that information to get the subprime loan; it's just that they classified me as subprime based purely on the lack of credit history, irrespective of that non-loan history. Providing that information, though required, doesn't get you back into prime territory.
Considering that in the recent financial industry crisis, the credit unions virtually never needed a bailout, while most of the large banks did, there is good support for the hypothesis of CU = non-idiot, larger banks/mortgage brokers = idiot.
(Of course, I do differ from the general subprime population in that if I see that I can only get bad terms on a mortgage, I don't accept them.)
SilasBarta:
This merely means that their formal criteria for sorting out loan applicants into officially recognized categories disallow the use of this information -- which would be fully consistent with my propositions from the above comments.
Mortgage lending, especially subprime lending, has been a highly politicized issue in the U.S. for many years, and this business presents an especially dense and dangerous legal minefield. Multifarious politicians, bureaucrats, courts, and prominent activists have a stake in that game, and they have all been using whatever means are at their disposal to influence the major lenders, whether by carrots or by sticks. All this has undoubtedly influenced the rules under which loans are handed out in practice, making the bureaucratic rules and procedures of large lenders seem even more nonsensical from the common person's perspective than they would otherwise be.
(I won't get into too many specifics in order to avoid raising controversial political topics, but I think my point should be clear at least in the abstract, even if we disagree about the concrete details.)
Why do you assume that the bailouts are indicative of idiocy? You seem to be assuming that -- roughly speaking -- the major financiers have been engaged in more or less regular market-economy business and done a bad job due to stupidity and incompetence. That, however, is a highly inaccurate model of how the modern financial industry operates and its relationship with various branches of the government -- inaccurate to the point of uselessness.
I actually agree with most of those points, and I've made many such criticisms myself. So perhaps larger banks are forced into a position where they rely too much on credit scores at one stage. Still, credit unions won, despite having much less political pull, while significantly larger banks toppled. Much as I disagree with the policies you've described, some of the banks' errors (like assumptions about repayment rates) were bad, no matter what government policy is.
If lending had really been regulated to the point of (expected) unprofitability, they could have gotten out of the business entirely, perhaps spinning off mortgage divisions as credit unions to take advantage of those laws. Instead, they used their political power to "dance with the devil", never adjusting for the resulting risks, either political or in real estate. There's stupidity in that somewhere.
These are not such different answers. Working on a large scale tends to require hiring (potentially) stupid people and giving them little flexibility.
Yes, that's certainly true. In fact, what you say is very similar to one of the points I made in my first comment in this thread (see its second paragraph).
Fair point. This does replicate the Conservation of Thought theme. I think a good bit about business can be explained as not bothering because one's competitors haven't bothered either.
I've seen financial gurus recommend getting a credit card and paying the balance.
And thanks for the ETA.
Ramit Sethi for example. I had the impression that this was actually pretty much the standard advice from personal finance experts. Most of them are not worth listening to anyway though.
This might be what they say in their books, where they give a detailed financial plan, though I doubt even that. What they advise is usually directed at the average mouthbreather who gets deep into credit card debt. They don'd need to advise such people to build a credit history by getting a credit card solely for that purpose -- that ship has already said!
All I ever hear from them is "Stay away from credit cards entirely! Those are a trap!" I had never once heard a caveat about, "oh, but make sure to get one anyway so you don't find yourself at 24 without a credit history, just pay the balance." No, for most of what they say to make sense, you have to start from the assumption that the listener typically doesn't pay the full balance, and is somehow enlightened by moving to such a policy.
Notice how the citation you give is from a chapter-length treatment from a less-known finance guru (than Ramsey, Orman, Howard, etc.), and it's about "optimizing credit cards" a kind of complex, niche strategy. Not standard, general advice from a household name.
That would be an insanely stupid thing for anyone to say. Credit cards are very useful if used properly. I agree with mattnewport that the standard advice given in financial books is to charge a small amount every month to build up a credit rating. Also, charge large purchases at the best interest rate you can find when you'll use the purchases over time and you have a budget that will allow you to pay them off.
::followed link::
Did you ever experience nicotine withdrawal symptoms? In people who aren't long-time smokers, they can take up to a week to appear.
For what that's worth, when I quit smoking, I didn't feel any withdrawal symptoms except being a bit nervous and irritable for a single day (and I'm not even sure if quitting was the cause, since it coincided with some stressful issues at work that could well have caused it regardless). That was after a few years of smoking something like two packs a week on average (and much more than that during holidays and other periods when I went out a lot).
From my experience, as well as what I observed from several people I know very well, most of what is nowadays widely believed about addiction is a myth.
No, never did. My best guess is that I didn't smoke heavily enough to get a real addiction, though I smoked enough to get the psychoactive effects.
Yes, I would think it would take around 5-10 cigarettes a day (or more) for at least a week to develop an addiction. While cigarettes (and heroin, and caffeine) are very physically addictive, it still takes sustained, moderately high use to develop a physical addiction. Most cigarette smokers describe their addictions in terms of "x packs per day".
Okay, then I guess my case isn't informative ... I'd use the pack/year metric instead instead of the pack/day.
Expected profit explains much behavior of credit card companies, but I don't think it helps at all with the behavior of the credit score system or mortgage lenders (Silas's example!). Nancy's answer looks much better to me (except her use of the word "also").