Wednesday, May 20, 2009

Today's Class

The slides from today are available here.

Here's my slightly extended take on the question of the relative importance of individual choices versus exogenous factors in determining success (as defined by high incomes).

I think that, with a few exceptions, certain individual choices are necessary for achieving certain levels of success. That is, I believe that achieving and maintaining success requires alot of the stuff that people always recommend -- e.g., willingness to work, investments in human and social capital, etc.

That said. Making the "necessary" choices is not sufficient to ensure the equal degrees of success. Similar people making identical (or nearly identical) choices (and thus meeting the necessary conditions) can still experience significantly different outcomes for a variety of reasons. For instance, two people making similar choices could end up working at similar jobs at different firms, but one firm could collapse while the other thrives. Alternatively, the market return (e.g., the wages offered) for choosing to cultivate certain skills can vary widely across time or space (e.g., individuals with basketball skills make substantially more money today than they did 40 years ago).

Even if making the same chioces generated highly similar outcomes, it is unclear to me that we should say, "Joe's success reflects Joe's choices." That may be true in a nominal sense, but Joe's choices cannot be entirely attributed to Joe. Not everyone has the same set of choices available, nor do they make their choices facing similar incentives. The choices available to individuals are shaped by their environment -- country, community, family, etc. As such, for some people in some families or places certain key choices are not even available (e.g., girls not allowed to go school in Afganistan, small children have no control over the school they attend or the number of educational resources available at home). Furthermore, even if individuals face identical choice sets (that is the same basic set of choices is available to everyone) the incentives to choose A over B are shaped by factors exogenous to the individual. That is, the percieved and actual benefits and costs associated with a decision are not identical. Parents, peers, communities, governments, ... affect these benefits and costs. As such, again, the differences in choices and outcomes that are observed should not be attributed entirely to the individual.

Exactly how much variation in outcomes reflects exogenous factors versus individual choices is hard to say. We don't get to observe many parallel universes where everything else remains the same, but we observe you making different choices. However, it is worth noting that correlations between sibling earnings are very high (approximately 0.5*) and stronger in families with higher socio-economic status (where perhaps choice sets are larger and families exert more control over choices). So it is not unreasonable, in my opinion, to think that exogenous factors are relatively important.

* Here's an excerpt from the link to help you think about what a correlation of that magnitude implies:

If one compared the earnings or wages of two sets of randomly chosen individuals from the population, one would not expect to find any correlation between the groups. In contrast, one would probably expect to find some positive correlation if the comparison was between pairs of siblings. Specifically, the correlation between siblings in a particular outcome measures how much of the overall variance in that outcome is due to all of the factors that siblings share in common-namely the same family and the same community influences (e.g., peers, schools).1

In this Chicago Fed Letter, I discuss some new research in which I show that the sibling correlation in economic outcomes (e.g., annual earnings) is close to 0.5. This suggests that about half of earnings inequality in the U.S. can be explained by family and community influences during childhood. To provide some context, this is roughly the same magnitude as the sibling correlation in height, a characteristic that presumably has a large genetic component. Given the multitude of factors that are involved in determining one's earnings (e.g., schooling, skills, choice of industry/occupation), one might find such a high correlation very surprising. This finding also suggests that inequalities between families persist strongly from generation to generation and that the U.S. is a less mobile society than is commonly believed. I also find that the sibling correlation has risen in recent decades suggesting that the U.S. may have become less mobile.

I think that regardless of career path, the choices you make have an enormous impact on your future. If you choose to screw around in high school and not receive decent grades, your path to college( assuming you want to go there) will be much tougher. Likewise, suppose your goal is to work for one of the big 5 accounting firms, but in college you party too much and don't spend enough time studying and looking for internships to build your resume. That choice will likely prevent your goal from being achieved, or it will at least make it much more difficult to accomplish. All of that said, I think luck plays a role in everything too.
Some people would never have met their future wife/husband if they had chose not to go to a certain party, others would have never gotten a job at firm X if they had decided to skip that wedding where they met a person that recommended them. These aren't the same type of choices that are typically associated with future career success, but they do play a big role.
I thought the positive correlation between siblings was an interesting matter. It made me think of myself (I'm the oldest) and my younger siblings. I have a brother who is 20yrs old (4yrs younger than I), another brother who is 8yrs old (16yrs apart) and my sister that recently turned 6yrs old, a much greater gap between my sister and I. Since I can remember my parents always told me that I needed to set a good example for my younger siblings, they constantly reminded me that everything I did was put in high regard. As the oldest I do feel that I have a responsibility to set the bar high for my younger siblings so they too can go to college, graduate, and become whatever they want to be.
In high school,I began working at a bank through an internship. Years later due to my high standing and likability the same manager that hired me, practically offered (gave) my brother a position. Which was lucky for him because I had to apply, make a resume, type a letter of intent, get letters of recommendation to even get the position. But, they were just waiting for him to say he wanted the job since he was related to me. I can see that working at the bank for my brother has improved his social skills and self confidence and he is no longer quiet and shy as he use to be. Plus, it has made him very independent. I know he looks up to me and he strives to make more than I. But I of course cannot let that happen :) We are constantly competing against each other and feeding off each other to do better. Even our youngest brother wants to dress nice at the age of 8. He was excited to receive a button up dress up shirt and tie since he see's his older brother wear them to work :)
Lately I've been thinking too much about our class discussions regarding economic success and the roles that exogenous and individual factors play in it. While it seems difficult at this point to ignore the facts: that success is much more predetermined than I ever thought it was, I realized that I don't like it. Even the comments left by previous students about how personal choices in regards to grades do have significant impacts on a person's future are actually somewhat exogenously determined. The mentality of that student who chooses to skip class or study hard is determined, at least partially, by his/her environment growing up <--an exogenous variable. I wonder, however, if the same studies applied to different nations with cultures and social mentalities different (and potentially much more diverse) from our own would yield the same results... or perhaps that's just wishful thinking.
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