D. Kahneman serves up a wacky counterfactual

I followed a link from Tyler Cowen to this bit by Daniel Kahneman:

Education is an important determinant of income — one of the most important — but it is less important than most people think. If everyone had the same education, the inequality of income would be reduced by less than 10%. When you focus on education you neglect the myriad other factors that determine income. The differences of income among people who have the same education are huge.

I think I know what he’s saying–if you regress income on education and other factors, and then you take education out of the model, R-squared decreases by 10%. Or something like that. Not necessarily R-squared, maybe you fit the big model, then get predictions for everyone putting in the mean value for education and look at the sd of incomes or the Gini index or whatever. Or something else along those lines.

My problem is with the counterfactual: “If everyone had the same education . . .” I have a couple problems with this one. First, if everyone had the same education, we’d have a much different world and I don’t see why the regressions on which he’s relying would still be valid. Second, is it even possible for everyone to have the same education? I majored in physics at MIT. I don’t think it’s possible for everyone to do this. Setting aside budgetary constraints, I don’t think that most college-age kids could handle the MIT physics curriculum (nor do I think I could handle, for example, the courses at a top-ranked music or art college). I suppose you could imagine everyone having the same number of years of education, but that seems like a different thing entirely.

As noted, I think I see what Kahneman is getting at–income is determined by lots of other factors than education–but I’m a bit disappointed that he could be so casual with the causality. And without the causal punch, his statement doesn’t seem so impressive to me. Everybody knows that education doesn’t determine income, right? Bill Gates never completed college, and everybody knows the story of humanities graduates who can’t find a job.

9 thoughts on “D. Kahneman serves up a wacky counterfactual

  1. Well said. If he sticks to the last sentence of the quote, he'd have made the point without saying anything disagreeable. But then, he works with economists, and in that field, you have the tyranny of the "all else equal" thinking. I recall from my econ 101 they even have a Latin word for it, ceteris paribus.

  2. It is a little casual, but isn't this always a danger of translating an operationalization into plain language? In this case, I'd assume that "same education" means same category on a survey that might, at most, allow for differentiation by number of years but not by any qualitative measure.

    On the substantive point, I'm curious how strong people think the education-income relationship is, and whether they perceive it as roughly linear (i.e., do they see a college degree, specifically, as a big threshold). I'd imagine the perception varies quite a bit.

  3. Dave:

    Kahneman is a psychologist, not an economist.


    I see what you're saying, but he does say, "If everyone had the same education," and that to me invokes an image of educational uniformity. Not merely that everyone gets the same #years.

  4. Obviously not all education is created equal. But a possibly bigger problem is that there is a serious selection bias when you start thinking about how education relates to income. People who succeed in difficult academic disciplines would likely succeed in other challenging pursuits as well. So is it the education or the drive to succeed that is related to income? Education, whether we're talking about years of or type of education, is likely a crude surrogate for driven-ness, work ethic, or intelligence.

  5. He might not mean R^2, since there are other standard measures of income inequality (the Gini coefficient?).

    What he's getting at (as I see it) is that too much attention is given to education in policy and the media, when, after all, it's not really worth much. And he's neglected to give any evidence for the last claim. It reminds me of Eric Hanushek's (better supported) claim that spending on public education gives poor returns.

  6. Frank:

    Yeah. Kahneman is a brilliant psychology researcher but in this case it feels like he's processing some undigested econ regressions and then ironically using this as an example of how people don't really know what they're talking about.

  7. The education premium is one of the most discussed issues in labor economics. As Paul mentioned, there are serious selection problems, and you have any number of other omitted variables when you try to regress income on education. There have been some approaches with instrumental variables that have been pretty influential (Card, Angrist and Krueger in various constellations have written many of them), but I wouldn't want to call the evidence available so far conclusive in any way. This is probably where Kahneman got his 10% figure, but in the context of those studies, it should be interpreted as "another year of schooling increases income by 10% on average", given the effect is linear, which is pretty far from the conclusion Kahneman draws.

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