Who are buying the Chinese college lottery?

First, do the maths:

R=$1,000,000

p=0.0001%

V=$5

=> R*p=$1<$5=V

R is the return to winning a lottery, and p is the probability of winning the lottery. V is the face value/price of a lottery ticket.

The expected gain is only 1/5 of the price that you pay for a lottery.

Suppose that this simplest model represents most lotteries in the market. Your expected gain is far less than what you pay. Not a good deal! So – why do “rational” people buy lottery despite knowing their remote chances?

If you raise this question to a college student in Economics, he/she will explain to you with an argument for the gain of gambling, a concave/convex utility function or and Jensen inequality. But my dear ECON101 textbooks – let’s throw you away!

Instead, in one welfare economics class discussion that I had 4 years ago, the most intuition-friendly explanation, and perhaps the simplest one, is that if you have $5, you cannot buy a car anyway, so you are tracked in the routine of life (of course, forget about borrowing). However, winning $1,000,000 (even with a remote chance) means that you can buy a new house or a new car. That upgrades your life to a brand-new track, one that packages a great variety of middle-class choices (Sociologists now start to smile when they hear the word “class”). The return is not just about the monetary gain, but the “jump” into a higher layer of social hierarchy and the snowballing feed backs from that initial jump.

Sounds familiar? If you have heard of the variety of arguments about “poverty trap”, this may ring a bell.

Now think about China’s fantasy about college education, long-rooted in its culture that emphasizes the role of education on social mobility. I have been siding with the view that Chinese people overestimates the return to college education, but I would like to add that they are crazy about “college degree” for “good” reason. Would you buy a lottery, if it is overpriced? the “college lottery” can be overpriced in the sense that the net wage return, if conditioning on other factors in particular family background and residential status, does not match our fervent desire for a college degree. To take one step further, I hold the view that in the Chinese labor market for college graduates, family endowment is a substitute for education at the high-skill end, but a complement for education at the low-skill end. Thus poor people do not receive sufficient return from college education as compared to their rich counterparts if they are working in industries that requires low skills. If this is true, are many of us are seemingly “irrational”?

Yes and no. The fancy about high education is “irrational”, but our culture rationalizes it.  We love gambling. (The high saving rate in its economy seems to me a manifestation of our love for gambling.) We are willing to sacrifice small things now for a “huge” gain tomorrow. College does not pay off for a large proportion of poor people, but the spiraling gain from “success” after college, if it should happen, is luring enough for us to buy college. We are buying the college lottery.

Of course, this is my own speculation, or a thought experiment at most. A counter-argument to my college lottery story is that most Chinese people have no better alternatives, given the existing high labor supply for low-end workers. Thus if they don’t go to college, there is no place for them. Good point. Fair. By playing the lottery argument, I am at the risk of masking a two-sided story, or exaggerating the culture side. But who isn’t?

But the real question is: “so what”? This story is hardly new, of course. Who buys my story is not the same as who buys the lottery. I want to follow up and ask (in spite of sounding politically-incorrect): who are buying the Chinese college lottery?

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Comments

  • yxysamurai  On October 1, 2011 at 7:38 am

    Isn’t the “upgrade life to a new track” argument also an good explanation to the concavity of utility function?

    • mumamme  On October 1, 2011 at 11:51 am

      They are equivalent. Except that the “upgrade” argument is more about some kink points in utility function, i.e. not continuous at some jump points.

  • yxysamurai  On October 1, 2011 at 3:27 pm

    It seems to me that economists always focus on individual decision—-it’s important of course. However, just try to think about this problem from the other polar. For a “father image” or “mother image” in social level, it is a good way to maintain its own stability to initialize such mechanism.

    I think this point of view partly explains the success of Ke Ju (for its own sake) in our history. In the old days, the “father image” would hold a triumphal march for the top 3 lottery winners, in some sense, to establish certain “illusion” which could attract more young people to buy the lottery.

    In short, the culture side is not exaggerated at all.

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