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by jacobjacob1 min read9th Feb 20192 answers10 comments

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Education
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I won't attempt to summarise the case for there being an education bubble here (see links below for some pointers). Rather, my questions are:

1) assuming there is an education bubble, when will it -- as bubbles tend to do -- pop?

(This plausibly entails some disjunction of *hundreds of thousands to millions of students defaulting on their debt, *lower number of college applicants, *non-top-tier colleges laying off faculty, *substantial reductions the signalling value of obtaining a diploma, *substantial reductions in tuition fees, *reduction in the level of education required by various employers, and more)

2) Which assets will be more scarce/in demand as that happens? Are there currently available opportunities for "shorting" the education bubble and invest in ways which will yield profit when it pops?

(I hereby preface the comments by noting that nothing discussed there is investment advice and no users can be held liable for investment decisions based on it.)

Peter Thiel summarises the inside view of there being an "education bubble" well.

And here are some interesting numbers:

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ESRogs

Feb 09, 2019

14
2) Which assets will be more scarce/in demand as that happens? Are there currently available opportunities for "shorting" the education bubble and invest in ways which will yield profit when it pops?

Vocational schools seem like a reasonable bet. In particular something like Lambda School, where they've aligned incentives by tying tuition to alumni income.

VCs seem to agree, pouring in $14MM in a series A in October 2018, followed by an additional $30MM in a series B just 3 months later.

[-]ESRogs4y4

Btw, Lambda School twitter is fun to follow. They're doing some impressive stuff.

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2ESRogs4y
And the stories [https://twitter.com/Austen/status/1082815326960533504] of their students are heartwarming.

Alexei

Feb 12, 2019

7

I learned recently that some states used to offer an equivalent of "forever stamps" for education. Meaning you pay $X at any time and you've guaranteed your payment for a state university in the future. Obviously, they discontinued it, since the costs rose and they lost money. But if you wanted to short *education cost*, you'd basically want to sell these guarantees yourself.

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[-]paulfchristiano4y23
College spending is one sixth of US economy

What? That would be pretty crazy, if $1 of every $6 was being spent on college. The linked post mentions it in a parenthetical, without explanation or justification.

A few seconds of googling suggests that spending on college is about $560 billion per year, around 3% of GDP, which makes way more sense. Opportunity cost from students in college might be a further 2% or so, though if you are going to count non-monetized time then you should probably be using a bigger denominator than GDP.

I don't know what the "one sixth" figure could be referring to. Total student debt is <10% of GDP (though that's basically a meaningless comparison---more meaningful would be to say that it's about 1% of outstanding debt in the US).

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[-]SatvikBeri4y16

I think the prior that bubbles usually pop is incorrect. We tend to call something a bubble in retrospect, after it's popped.

But if you try to define bubbles with purely forward-looking measures, like a period of unusually high growth, they're more frequently followed by periods of unusually slow growth, not rapid decline. For example, Amazon's stock would pass just about any test of a bubble over most points in its history.

I expect something similar with education, spending will likely remain high, but grow more slowly than it did in the last 20 years. That's especially true because of the structure of student loans, people can't really just default.

But to answer the more direct question: assuming that there is a rapid drop in education spending, how could we profit from it? Vocational schools seem like the most obvious bet, e.g. to become a programmer, dental assistant, massage therapist, electrician, and so on.

Certification services that manage to develop a reputation will become strong as well, e.g. SalesForce certificates are pretty valuable.

You could directly short lenders such as Sallie Mae.

Recruitment agencies that specialize in placing recent college graduates will likely suffer.

Management consulting firms rely heavily on college graduates, and so do hedge funds to a lesser extent.

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[-]shminux4y14

Always good to look for a reference class example. Have any cost disease bubbles burst before? If not, why not, if so, what happened?

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[-]johnswentworth4y9

If we buy into Bryan Caplan's model, then it's not really a bubble so much as zero-sum arms race. It's less like tulips, and more like keeping up with the Joneses. Keeping up with the Joneses doesn't pop; it's a stable phenomenon.

In the case of education, people who are diligent/smart/conformist get a degree, employers mostly want to hire those people, so then everyone else tries to get a degree in order to keep up, and the diligent/smart/conformist people then have to get more degrees to stand out. That's a signalling arms race, but it's stable: nobody gains by doing something else.

We shouldn't expect to find ways to "short the bubble" for exactly that reason: it's stable. If there were ways to gain by shorting, then it wouldn't be stable. Sure, we'd all be better off if we all agreed to less education, but the Nash equilibrium is everyone defecting. Policy position for 2020: ban higher education!

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[-]jacobjacob4y20

Asset bubbles can be Nash equilibria for a while. This is a really important point. If surrounded by irrational agents, it might be rational to play along with the bubble instead of shorting and waiting. "The market can stay irrational longer than you can stay solvent."

For most of 2017, you shouldn't have shorted crypto, even if you knew it would eventually go down. The rising markets and the interest on your short would kill you. It might take big hedge funds with really deep liquidity to ride out the bubble, and even they might not be able to make it if they get in too early. In 2008 none of the investment banks could short things early enough because no one else was doing it.

The difference between genius (shorting at the peak) and really smart (shorting pre-peak) matters a lot in markets. (There's this scene in the Big Short where some guy covers the cost of his BBB shorts by buying a ton of AAA-rated stuff, assuming that at least those will keep rising.)

So shorting and buying are not symmetric (as you might treat them in a mathematical model, only differing by the sign on the quantity of assets bought). Shorting is much harder and much more dangerous.

In fact, my current model [1] is that this is the very reason financial markets can exhibit bubbles of "irrationality" despite all their beautiful properties of self-correction and efficiency.

[1] For transparency, I basically downloaded this model from davidmanheim.

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[-]johnswentworth4y10

That model works, but it requires irrational agents to make it work. The bubble isn't really "stable" in a game-theoretic equilibrium sense; it's made stable by assuming that some of the actors aren't rational game-theoretic agents. So it isn't a true Nash equilibrium unless you omit all those irrational agents.

The fundamental difference with a signalling arms race is that the model holds up even without any agent behaving irrationally.

That distinction cashes out in expectations about whether we should be able to find ways to profit. In a market bubble, even if it's propped up by irrational investors, we expect to be able to find ways around that liquidity problem - like shorting options or taking opposite positions on near-substitute assets. If there's irrational agents in the mix, it shouldn't be surprising to find clever ways to relieve them of their money. But if everyone is behaving rationally, if the equilibrium is a true Nash equilibrium, then we should not expect to find some clever way to do better. That's the point of equilibria, after all.

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[-]gbear6054y3

"hundreds of thousands to millions of students defaulting on their debt":

From my understanding, this can't really happen (in a way that causes financial issues for the lenders). As long as student loan holders have income, it can be garnished to pay off student loans. In addition, you can't use bankruptcy to get out of them.

Because of this, it's not really a bubble, since it can't pop. It will just generally depress the country's economy without causing any sudden crash.

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[-]johnswentworth4y8

It could pop under political pressure to allow student loan forgiveness, and indeed I've heard plenty of people who want exactly that.

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