Why do people attend University?

All students have asked themselves - at least once - if it is actually efficient to spend time studying irrelevant concepts at university, while they could be already working for employers that would never require most of those concepts. History dates and facts, integrals, subjects and predicates are just some examples of topics that students need to incorporate during their learning process and demonstrate it in specific examinations.

In my particular experience, I have worked during my bachelor degree and after finishing it. Now, that I am pursuing a MSc in Behavioral Economics and Game Theory, I find myself again studying theories and topics that would never be required in a professional environment and I cannot avoid feeling a bit frustrated by this situation. What is more, although companies do not need their workers to know much of the concepts they learnt at university, they still require that applicants have finished particular programs and with minimum GPA. The apparently irrational situation could be illustrated like the following: Jake goes to undergraduate and graduate school and spends 6 years of his life studying and learning things that he knows will be completely useless in his future professional career. In the meantime, Companies filter applicants that do not have Jake background, although they know that Jake´s knowledge is completely irrelevant and unnecessary.

So, why does Jake still attend University? and why do companies still require unnecessary and irrelevant knowledge?

Fortunately, Game Theory has a brilliant answer to this question. We can think about the job search process as a game with incomplete and asymmetric information. The Applicant goes to a job interview knowing his characteristics, strong and weak points and the Employer has to evaluate and compare this Applicant with other ones, based on the information that the Applicant provides and other references that he may get. Being in a job interview is not an easy task, but all applicants know that they must sellthemselves. Thus, they will try to seem intelligent and the ideal candidate to fulfill the vacancy. If an Employer needs a worker to do an analytical job, then it will be extremely difficult to choose among several candidates that are making their best to seem analytical profiles. Therefore, the Employer will try to find a signal that help him determine the type of the Applicant (for simplicity, assume Good or Bad). All Applicants will try to seem Good candidates, so they will be willing to provide a good signal to the Employer. This means that in order to have a useful signal, it must be costly, because otherwise all the Applicants would be able to deliver the good signal and it will become completely uninformative.

University programs can be interpreted as costly signals that job applicants provide to their potential employers. A Bad Applicant for an analytical position, would need to put much more effort to finish an analytical university program and, if he achieves it, probably will not even try to attend graduate school. On the other hand, a Good Applicant for an analytical position, needs less effort to understand analytical tasks. Considering that effort is a source of disutility (all of us want to maximize our utility, and putting effort in a task lowers our utility), probably just Good Applicants will finish analytical PhD programs and the Employer knows that if he sets a PhD degree as a minimum requirement, he will probably find just Good Applicants. Of course, this does not mean that there are not Good Applicants without graduate studies or that there are not Bad Applicants with PhD degrees, but the signal of studying particular programs is so costly, that the probability of someone not ideal for it actually doing it, is definitely low.

So, why do people attend university? the first answer would be that people attend university to learn but this vision is completely biased. Students decide to go to university in order to get the appropriate signal that will give them the opportunity to be considered for particular jobs. Therefore, the difference between a PhD in Economics from Harvard and an applicant without a university degree is not how much they actually know, but a signal about what type of challenges each applicant can overcome. In other words, if a person was accepted in Harvard and finished his PhD with a Cum Laude diploma, it means that he was able to learn extremely difficult - and probably useless - concepts and that he was able to outperform in complicated and stressful situations. So, if he could learn how to calculate complicated integrals and optimizations, he will probably be ready to learn the particular tasks related with his job position.

Going back to the Game, the Applicant will go to the job interview trying to seem a Good candidate. However, the Employer will use the university degree as a signal about the candidate suitability for the job position. Knowing this in advance, young and ambitious students will decide to go to university and pursue complicated programs, no matter if the content is useful or not. Bad applicants will have to put so much effort that the disutility will be high enough to discourage them to continue and will never get the appropriate signal, while Good applicants will finish the program because the necessary effort will not be so high for them.

In conclusion, this analysis states that students do not go to university to learn, but for signaling. This does not mean that they cannot learn anything in the process; in fact they will probably learn several useful and irrelevant concepts. In addition, there still are job positions for which this theory does not apply, such as medicine, architecture or academia. For all these examples, university is also the first quasi-internship, so the conclusions may be completely different.

References:

Job Market Signaling (Michael Spence). The Quarterly Journal of Economics, Vol. 87, No. 3. (Aug., 1973), pp. 355-374