One of Vanguard founder Jack Bogle’s axioms in personal finance is that the more you pay to buy investments, measured by the fees, the less you get over time measured by total return. This principle is illustrated very well in the PBS Frontline documentary The Retirement Gamble in which Bogle appears to introduce the idea.
Recently I started reading Phishing for Phools (2105) by Akerloff and Shiller, which takes thesis that market competition leads to hoodwinking of consumers. Shiller is known for his work on economic models of housing prices and his most famous book Irrational Exuberance. Akerloff is an economics professor at Georgetown. Both are Nobel laureates.
I hadn’t made it very far into the book when it struck me that Bogle’s axiom could be extended to more than just the trade offs between passively and actively managed mutual funds. In the very first pages, Akerloff and Shiller introduce the concept of reputation mining. In classic economics professor fashion (harnessing the undergraduate cliché of a basket of goods at the supermarket), they use a fruit metaphor:
“If I have a reputation for selling beautiful, ripe avocados, I have an opportunity. I can sell you a mediocre avocado at the price you would pay for a perfectly ripe one. I will have mined my reputation. I will also have phished you for a phool.”
The banal fruit metaphor becomes more provocative when they proceed to apply it to the way in which ratings agencies mined their reputation for credibility in the run-up to the subprime mortgage meltdown. For a good illustration of context of this chapter of American financial history, watch the 2015 film The Big Short.
When most customers get tricked into buying overpriced goods, collapse is possible when some part of the market wises up. My mind immediately leaped to another part of the economy that is arguably engaging in widespread reputation mining: higher education. Many people say that higher ed in the United States represents a bubble similar to the one built on bad mortgages in the United States. A few years ago the amount of student loan debt exceeded credit card debt at more than $1 trillion. Reportedly, more than 40 million Americans are paying down these loans, which tend to have more affordable interest rates than credit cards but cannot be expunged in bankrutpcy.
Have all these Americans been ‘phished for a phool?’
Much research shows that college remains a good investment. Yet as much as I love higher education, particularly the liberal arts tradition I benefited from at Kenyon College, I think a solid case can be made that the higher sticker prices of recent years, combined with the increasing use of part-time adjunct instructors, fit a pattern of reputation mining. According to PBS: “Adjuncts now make up more than 70 percent of all college and university faculty, often juggling a course load at multiple universities, earning an average of $2,500 per course.” Meanwhile, according to an editorial in the New York Times, “if over the past three decades car prices had gone up as fast as tuition, the average new car would cost more than $80,000.”
Thus while the job security of the typical university instructor has vanished, which I think is a headwind against teaching quality, the product has (in the case of public universities) quadrupled in price. There are many factors influencing these trends, but they don’t seem sustainable. If tuition remained the same but classes were offered through prerecorded online lessons and proctored via algorithms, teacher salaries could plummet further. This would be blatant reputation mining. It would also mean that students and their families would be paying more for less.
Just like the mortgage market, these macro-trends oversimplify a very complex set of market interactions. I think reputation mining is going on at the same time as many university experiences represent genuine value for each tuition dollar spent. I’m still a big supporter of higher education, and believe that teachers will be more important than ever in our future as many jobs become obsolete through automation. Families now have to be strategic and savvy to avoid being ‘phished.’
In my own educational experience, I believe that my Kenyon degree, though expensive, represented real value. From that base I’ve been able to build a career as a writer and editor. My Master’s in Journalism at the University of Maryland was similar. During my time as a writer working for Georgetown, I got free tuition which I applied to earning a Master of Professional Studies degree in Technology Management. The ten courses I took were taught exclusively by adjuncts. Was this Georgetown mining its reputation for dollars? Tough call. I was glad that many of my teachers in technical subjects were practitioners of those subjects rather than academics, so I valued that they all had relevant day jobs and moonlighted their expertise. But on the value spectrum between the residential undergraduate experience at Kenyon and the night-school-style Professional Studies degree, I think I got a lot more value in my earlier studies. As much as I enjoyed studying tech at Georgetown, had I needed to pay the tuition out of pocket, I likely wouldn’t have gone for that extra degree.
A lot of financial wisdom amounts to ‘avoid getting ripped off.’ Alas, we live in a world where market forces make that a tricky thicket. I’m looking forward to delving further into Phishing for Phools.