Opportunity Cost of Studying for a Degree of your Dreams.

My daughter has a strong artistic bent.

As a father, I have chosen to let her pursue her interests. Recently, I have been tempted to transfer her to language classes to reinforce her weak English scores, but I think my daughter would be much unhappier without Art classes in her life.

I also had an interesting conversation with a friend regarding this matter. This conversation came about because I have always expressed my unwillingness to work with an artist to create an RPG product because I was not confident that they are conscientious enough to deliver on time ( yes, even with money from me) :

Friend : " It is entirely possible that Clio will grow up and be the kind of artist that does good work and deliver on time. "
Me : "We don't call these people artists in Singapore society."
Friend : " What do you call them ?"
Me : "Architects. "

When I had this conversation, I was just being my usual trollish self.

Last week's Economist has a really nifty article on the opportunity costs of studying for a degree. The insight from the article was brutal. The Economist reports that while degree holders who study the humanities in Oxbridge tend to do rather well in the work-force, but this was because their positions in these universities signalled high intelligence. Had these same students study for a vocational degree (like Business, Engineering or PPE), they would have been able to earn even more money within their lifetime.

The folks at the Economist employed a very interesting tool to measure this opportunity cost, some Oxbridge graduates who opted to study the humanities instead of a vocational degree would have lost an annuity worth up to $500,000 when they picked a degree they were passionate about. Of course, for most Oxford graduates, this was never an issue, because they came from fairly rich families in England.

Today I am going to transplant a similar approach to Singapore and consider this test scenario.

Suppose, like Clio,  you enjoy doing Design, but you are also reasonably competent in Mathematics, what would be the opportunity cost of studying Industrial Design instead of, say, Mechanical Engineering?

If you look at this page from Seedly, starting salaries by degree can be found on the Web. The starting pay of a Mechanical engineer is $3,400. Industrial design, being one of the lowest paid degree programs in Singapore, provides a starting pay of only  $2,890.

Now I don't have a lot of data on annuities, but I do have access to REIT data. At REITDATA.COM I downloaded the list of REITS onto a spreadsheet and did an arithmetic average of their dividend yields. I got 6.4%.

An equally weighted REIT portfolio yields 6.4%.

What is the opportunity cost for Clio to choose Industrial Design over Mechanical Engineering ? I would take the difference in pay over one year and divide it by 6.4%.

This would be [($3,400 - $2,890) * 12] / 0.064 or $94,625.

This means that to equalise a design career with an engineering career, Clio must have a REIT portfolio worth $94,625. This exercise only considers one year of income, if a Mechanical engineer has better increments than a design professional, it is very likely that this opportunity cost is an under-estimate.

Of course, this exercise does not attempt to downplay the value of a person's personal aspirations, it merely puts a value on someone's dreams. Is a person's desire to do design worth that $94,625 if this same person would have done ok in an engineering field. This puts different spin on how to think about the degree you might wish to study.

Recently Alvin Chow of Dr. Wealth called me out on something I wrote in my books many years ago.

Eons ago, I wrote that one generation has to study engineering so that the next generation can afford to study law or medicine. Subsequently a generation needs to become successful lawyers and doctors so that their children can in turn become artists, poets and singers. Alvin asked me whether I continue to stand by what I said before.

I did not have a proper answer for Alvin then because, when I wrote my books, I never thought that I would be called to the Bar years later. Based on my own framework, I managed to compressed two generations of work into one.

When i wrote that sentence, I never had to entertain the thought that my children can even afford a life in the Arts or the Humanities.

I guess here is another reason why you write books. One day people will try to hold you against what you wrote many years ago.

I guess, with this article, I have just set the price of Clio's dream.