The following article was published in the Journal of College Admissions, Spring 2021 issue, on pages 15-17, and titled, “The Economics of Comparisons.”
I would like to make you a deal. There are two very similar objects that you are considering buying. One is $10 and the other is listed at $20, but I am going to offer it to you for $10. Which would you buy? In most cases, people would select the latter. Why? Because you are getting 50% off of that object. What a great deal!
In a real-life example, in the mid-2000s, the Economist magazine was offering three annual subscriptions: 1) a digital only version for $59, 2) a print version for $125, and 3) a print and digital version for $125. You may be asking yourself the same question everyone else was asking – why is option number two even there? Who would have pay the same amount for only a paper version when they could have the paper version and the digital version for the same price? You are correct – in an experiment by Dan Ariely, when people were given the three choices, no one chose the second option. Instead, 84% of people chose the combination deal and 16% chose the digital only option.
So why not remove the paper-only subscription? Clearly no one wants it. In the next experiment, the paper-only version was eliminated and people could only choose the digital version for $59 or the digital and print offer for a combined for $125. What would you expect from the results? Unless you have heard this before, prepare to be surprised. When given just the two options, the web-only subscription rate jumped from 16% to 68% and the combination web and print deal fell from 84% to just 32%.
If you think this experiment to be an aberration, you would be mistaken. There are hundreds, if not thousands, of studies showing that consumers can be easily influenced by manipulating pricing to make purchases. We would like to assume we are all logically minded when it comes to making important decisions but the answer is far from the truth.
Before I get any farther sidetracked into my love of behavioral economics, I need to share why you need to read this article before you or your family members are ready to select a college to attend.
For the sake of the argument, I am going to compare a private university with a public university in a state where you live. This comparison work for almost every state in the country as public universities in a state are rarely ever priced above any private universities in their state. I am not going to identify the two universities being compared as my point is not about any one university, but the concept of understanding how college pricing often works.
Private, the name I am giving to the private institution in this example, had a 2019 price of $64,880. Public, the state flagship university in this example, had a fall 2019 price of $27,728 (assumes in-state resident). When comparing these two numbers, Private’s sticker price ended up being 233% more expensive than Public’s sticker price. You could send at least 2 children to the Public U. for the price of the Private U.’s education.
But wait, we know that almost everyone qualifies for financial aid so let’s move from the sticker or published price and now examine the average or net price a student at these colleges pays.
The net or average tuition cost for a student at Public is:
- $20,454 if they come from a family earning $75K-$110K or
- $24,670 if they come from a family earning $110K or more.
Option B provides an 11% tuition discount and option A provides a 26% tuition discount. So even the wealthiest people applying to Public receive on average, about a 10% discount and folks who might be described as more middle-income (it is all relative) are being offered about 25% off the posted price.
When we look at the new tuition cost for a student at Private, we also find reduced price tuitions for various income levels. The average tuition cost for a student at Private is:
- $35,300 if they come from a family earning $75K-$110K or
- $42,722 if they come from a family earning $110K or more.
When compared to that sticker price, these sound like incredible discounts! Option B is a 34% discount – three times the discount for this same income range at Public. Option A offers a 46% discount – almost half off a Private education! This discount is almost double the 26% discount for the same income group at Public.
Now let’s go back to the first paragraph of this article. I have two similar objects for sale – one is $10 and the other was $20, but for you it is only $10. Do you recognize that the same behavior principle leading more people to want the 50% discount at the same cost as another object is at work in selecting colleges? For example, would you rather tell someone that you are going to Public with a $7,000 scholarship or tell someone that you are going to Private with a $30,000 scholarship? When scholarship amounts are considered, it is a no brainer, right?
The reality is that when humans try to make decisions that include comparisons, we can be quickly manipulated. Remember the print subscription of the Economist that no one bought? Do you remember what happened when the decoy number (print only) was dropped and the people selecting the digital only version went from 16% to 68%! In order to help us understand how we can be so easily tricked, I need you to start off with one key fact – the actual cost of a university to educate one student has very little, if any, correlation to the price to attend the college. In other words, the sticker price being shared by colleges is a number that has little to no correlation to the cost of educating a student. Instead, the cost to a college to educate a student has many more variables including, but not limited to: 1) the number of students put into classes, 2) the quality of the campus facilities, 3) the ability to raise money, 4) the size of the endowment, 5) the number of full-time faculty, and honestly, 6) the wealth of the students a college can attract.
When I have been in meetings to discuss (mainly listen) the sticker price of a college, the assumption is almost always that the college will increase a set percentage every year and that percentage will be enough to give everyone a raise that at least equals the inflation rate and ideally include additional money for emerging initiatives. In my thirty years of working at colleges, I can’t ever remember a time when anyone mentioned the tuition price needing to be in relationship with any actual cost of educating a student.
With that now established, if I offer you two very similar objects at different prices, which would you chose? Most people chose the less expensive option. In other words, if I told students applying to Private and Public that Public was priced at $24,670 and Private was priced at $42,722, which would they choose? Public, right? However, we don’t know the actual results of this choice because the private (or pricier) colleges do not want their potential customers seeing these prices without the context of the discount. Is it true that the education at Private is worth 73% more than Public’s education, or over $18,000 additional money per year? How would you even go about answering this question? Can you get an additional $18,000 of value out of Private in one year?
There are hundreds of factors that could be used to consider this choice. In this case, I know that Public ranks in the top 50 and Private in the top 80 of colleges by U.S. News. I know that that Public’s graduates earn an average of $6K more in salary in their first year out of college. I know that in 2019, the average Public graduate with debt had just under $25K they owed while the average Private graduate with debt had just over $50K in debt. On the other hand, many people are attracted to Private because they often offer a smaller and supposedly more close-knit community on campus and the prestige that comes with saying one attends a private university. The two largest differences between public and private universities, other than price, is that publics get money from the state (and privates don’t which is a significant factor as to why their prices are higher), and because of that publics are required to follow a number of state policies for oversight of a university. On the flip side, private universities have certain federal requirements they must follow, but have extensive freedom to run their university as they fit outside of these rules.
So is a private college worth thousands of dollars more than a public institution per year? Speaking from a fiscal perspective, probably not. If we are open to allowing our feelings of prestige and perceived quality play a role, then arguments could be made for more expensive private schools.
To provide some context on comparing college prices, I would like to take you back to the spring of 1988, when I was faced with a similar decision. I had visited 25-40 colleges with my father. We did a road trip through Pennsylvania to see Swarthmore, Haverford, Dickinson, Gettysburg, Muhlenberg, Lehigh, Lafayette, Villanova, Franklin & Marshall, etc. We did two southern road trips that allowed us to hit Davidson, UNC, Duke, Wake Forest, UVA, NC State, Richmond, William & Mary. In our state, the top two colleges we considered were Hopkins and Maryland. I found one of the many pages I was making notes on about the various colleges and included it with this post.
In short, I fell in love with Duke. If you go to their campus and see it, it is hard not tofall in love with it. It is gorgeous. Wealth, excellence, and beauty pervade the campus. At the time, it was going to cost me/us $20K per year to attend Duke. My father understood the significant financial savings that come from attending an in-state institution. He had attended the U. of Maryland for his bachelor and doctorate degrees. Maryland had already admitted me to their Honors College and it would only cost me/us $5K per year.
I grew up in a middle class home – we knew we were not poor and we knew we were not rich – at least in comparison to the kids in my high school and town. So this price difference of $15K for one year of college was significant. Duke was four times more expensive than Maryland. My father asked me, “How are you going to get four times the value out of Duke versus a Maryland Honors Program?” I couldn’t really answer him. Maryland would have been a fine institution from which to graduate but at that time it had over-expanded and was in the midst of digging out of the Len Bias scandal (one of my personal heroes.)
From a behavioral economics perspective, we needed a middle option between the low and high options. Thus, I ended up enrolling at the U. of Virginia, which was going to cost us $10K per year, double the cost Maryland, but only half the cost of Duke per year. I was able to identify a number of factors that ultimately led my father to accept this compromise. In retrospect, maybe even this compromise was irrational. Did I get double the value of my education at UVA? Of course, I want to say “yes” but I realize that I have no idea what my experience at Maryland would have been like.
Now for the real hard truth – which some of you will not like. I can show you extensive data demonstrating the choice of a college is one of the least impactful variables in the success of a student. It may be the one decision parents think they have the most control over but the reality is that their 18 years of parenting is by far the most important variable in a student’s success. The book image on the right is the best collected evidence on this I have found. In short, the factors that result in student success are typically already present when they apply and if not, it is mainly their choices for engagement within college than their actual choices of a college that alter any success trajectory. I say more about this in a subsequent article – try to trust me for now.
Now we know that the choice of a college has little to no comparative impact on the success of a student, the price of a college has little to do with the cost to educate a student, and that most colleges, especially private universities, have learned to frame their prices such that we think that the better option feels like it should be a major “scholarship” (i.e. discount). A large scholarship communicates that we are important to and wanted by this college and although it might still cost more than a similar institution, we often opt for the discount. But is the deal really that incredible?
Two of my children are likely heading off to college in the fall. I have learned a lot about how our minds and colleges work to guide/manipulate our choices and I don’t want my friends and their high schoolers making a mistake that results in loan debt significantly more than a student/family can bear in early adulthood.
Your choice of a college may feel like the love wrapped up in decision to marry a lifelong spouse, but the data show that this emotion can sometimes be deceptive and ultimately cost you and/or your family a lot of additional money.