Are you relaxed when you go to college?

"Bottom Babe"

Reminder: Summer vacation is coming to an end and school is about to start.

Many freshmen who are about to enter the university campus, when they light the lamp to study hard to prepare for the college entrance examination, must have heard the words of teachers or parents: "You will be relaxed when you go to college!" ”

Is this really the case?

After going to college, you will find that although there is no endless "five three", there are still "early eight" that cannot be done; Although there is no teacher to urge you to study all day, there is also ubiquitous peer pressure: classmates' grade points are infinitely approaching 4.0, projects, competitions, exchanges; Examination, postgraduate examination, IELTS examination...

You can't help but ask: "It's easy to go to college"? Why do you still have to study hard to prove yourself?

Professor Nie Huihua uses simple economic principles in "Everything is a Contract: Game and Decision in the Real World" to explain the deep reasons for your hard reading.

1. Why go to college

In an imperfect world of information asymmetry, we prove ourselves to the outside world almost all the time. In 1973, Spence, a Ph.D. in economics who had just graduated from Harvard University, published his doctoral thesis in the world's top quarterly journal of economics (QJE). The article became a classic of the signal-emitting model, for which Spence won the 2001 Nobel Prize in Economics. Interestingly, his mentor at Harvard at the time, Thomas C. Schelling. Schelling was awarded the Nobel Prize in Economics after him. It is very rare for students to win Nobel Prizes earlier than teachers.

The Nobel Prize-winning essay in economics raises a seemingly boring question: Why should we go to school?

Let's consider such a scenario. You and your friends around you want to work for a well-known local Internet company. This company needs a lot of smart people and pays them according to how smart they are. In real life, Google, Microsoft and Huawei have set up such "genius" positions. Of course, cleverness is only one of the success factors, not the only one. Some of your friends are smart, some are generally smart, and you know how smart you are, but the company doesn't know until they're hiring you.

Therefore, there is a kind of prior information asymmetry between you and the company. Obviously, everyone wants to enter the company and get a good salary, but how do you prove that you are smarter than others? After groping, everyone found a good way, that is, to study. If a person wants to score high in school, he must have a good memory, reasoning ability and calculation ability, and the smarter the person is, the easier it is to learn, and the less intelligent the person is, the harder it is to learn. Reading requires an investment of time and money, but reading by itself will not improve your IQ, which is often innate.

When reading becomes a signal to prove yourself, what do you choose? This brings us to the two rules for making the best choice.

"Little Joy"

First, you need to weigh the costs and benefits of reading. Cost-benefit analysis is a unique recipe for economics. The advantage of reading is that you prove that you are a smart person and can go to the company to get a higher salary after graduation. The cost of studying is that you delay for a few years and pay tuition, and you can earn a sum of money by going to work in these years, and this money is the opportunity cost of your study. At the same time, you also have to consider that the cost of reading hard is related to your intelligence.

Second, you need to consider the strategies of other partners and companies. When the company uses reading as a means to select employees, if there are many friends who think they are smart to read, then you who think you are smart need to read a few years more than them, so as to further distinguish yourself from them. When smart friends think about it this way, the result of the game will be that the years of reading are getting longer and longer, such as from undergraduate to master's degree, from master's to doctorate. In this game, the game of IQ will not end until some of the smartest people finally succeed in distinguishing themselves from others.

2. Two equilibriums

In this reading game, Professor Spence reasoned that two equilibrium would eventually be formed. The first type of equilibrium is called "separating equilibrium," in which different types of participants are separated by emitting different signals. A very smart group of people go to school for a few years before entering the company, and directly get a higher salary after working in the company; And another group of generally smart people simply do not study and start working in companies, thereby receiving an ordinary salary. In short, different intelligent types of people send different signals through whether they read books or not, which can be described as "the road to the sky, each side of the road".

The key question here is, when everyone sends signals by reading, how many years does it take for people who want to prove themselves to be smart? The answer to this question depends on the IQ distribution of the group, and the corresponding separation costs and benefits. If the majority of people in a group have average IQs, then a few very smart people simply going to college is enough to distinguish themselves from the average person.

"Little Joy"

If the majority of people in a group are smart, then a very small number of super-smart people (such as IQs over 140) must complete a Ph.D. in order to distinguish themselves from very smart people; In order to distinguish them from generally smart people, those who are very smart must complete a master's degree, and so on, and finally, those who are not very smart do not need to go to school, because they do not need to waste time proving themselves. Therefore, reading, as a signal, is actually a continuous variable that can distinguish between two or even more people. This can also be understood as the fact that people with strong abilities need to invest resources to actively prove themselves, while people with poor abilities can only wait to be proven by others.

But separation equalization is not the only result. If someone finds that although he has spent a high price to study to prove his IQ, but the high salary obtained by reading more is not enough to make up for the cost of reading, he will reduce the time spent reading until the benefit of reading is just equal to the cost of reading.

Interestingly, Spence found that there is a tipping point when people find that the benefits of reading are just as much as the cost—that is, it doesn't work to read more, everyone stops reading, or everyone goes to read the same amount of books (such as nine years of compulsory education), and then prefers to be paid an ordinary salary by the company as a normal person. The result is called pollingequilibrium, in which all types of job seekers send the same signal, and the company still can't distinguish the true type of job seeker after the fact, so it has to treat it according to average type and average salary.

3. Over-proofing

In extreme cases, if everyone in this society goes to study for a doctorate, then there is no signal value in studying for a doctorate, which is the same as not reading a book. It can be seen that it is not always profitable to transmit a signal, and sometimes it is better to transmit a signal than to have no signal. In other words, sometimes it is not necessary to prove yourself.

Most interestingly, some economists have found that if most people in a group invest a lot of resources to prove themselves in order to prove that they are different from a very small number of people - such as going to doctoral studies or even postdoctoral fellows - although the signal transmission will be successful, from the perspective of social optimization, this may lead to over-proof and waste valuable social resources. It's like two companies fighting a price war, no matter who wins in the end, in fact, both companies lose, because the winning company will not make a profit, and it will inevitably go bankrupt in the end. This is actually a kind of "prisoner's dilemma". Therefore, an efficient institutional arrangement should avoid everyone over-proves themselves. It's like Confucius's, it's too much.

"Youth School"

So, how to avoid over-proof of participants leading to waste of resources? Let's look at such a case. A few years ago, there were two major ride-hailing companies in China: one called Didi and the other called Kuaidi. Whether consumers or ride-hailing drivers, they want to choose a strong one. However, the market situation at that time was not clear, and for everyone, the strength of the two ride-hailing companies was asymmetric information.

Therefore, in order to prove that they are more powerful, more abundant and the market scale is larger, Didi and Kuaidi launched round after round of price wars and began a "burning money" game for several years. The two companies adopt various policies to subsidize consumers and drivers. In the most extreme cases, someone can even get a taxi for as little as 1 cent, but this situation does not last long.

On February 14, 2015, on Valentine's Day, the two companies announced their merger into one company, named Didi. Why did two incompatible companies suddenly merge? In 2015, Tencent founder Ma Huateng revealed the secret behind a speech at the University of Hong Kong. Ma Huateng said, I support Didi, Ma Yun supports Kuaidi. We are like a war, we lose about 20 million a day, then 30 million, and we lose up to 40 million a day. No one dares to stop, and as soon as they stop, their achievements are lost. Finally, I communicated with Jack Ma and merged with the cooperation of many capital parties.

For companies, the price war is a prisoner's dilemma that sends signals. If you do not dare to fight a price war, the company will be considered weak by the market and face the fate of elimination. But fighting a price war is another lose-lose result, which is excessive signaling.

In fact, Japanese companies recognized as early as the 50s of the 20th century that price wars between companies are "suicidal competition". To avoid over-emitting signals, they took three approaches. First, encourage cross-shareholding between enterprises to form an interest pattern of "you have me, I have you". Second, encourage enterprises to strengthen cooperation in different fields to avoid homogeneous competition. Third, encourage enterprises to "go out" in groups and occupy overseas markets together. The practices of Japanese companies are worth learning from.

Under information asymmetry, participants can prove their true type to others by transmitting signals. In addition to studying, everyone goes to obtain various certificates, enterprises participate in social charity activities, and entrepreneurs hold some social honorary positions, all of which are transmitting signals. In short, as long as you can do things that are not easy for others to do, you are distinguished from others, which is separation equilibrium.

But transmitting signals requires costs, and if the cost of transmitting signals and the benefits after differentiation are similar, then everyone will choose the same signal or simply not transmit signals, which is mixed equilibrium. In extreme cases, people may overtransmit signals, which leads to wasted resources.

Everything is a Contract: Game and Decision Making in the Real World