Monday, 17 January 2011

Don't be a fool, stay in school!

This is apparently the logical advice spouted from the masses every time a college athlete decides to pursue a professional career before finishing their senior year. "Get your degree so you have something to fall back on in case it doesn't work out." Seems like common logical sense. I never really paid attention to this thought until I was reading about Heisman winner Cam Newton planning to skip his last year and reading the mass response of how stupid he is for doing it. The stay in school crowd is wrong and here's why:

To get the most obvious part of the fallacy out of the way, and this is true no matter who you are, school will always be there to go back to. You can pick up in the same spot you are now (maybe a few refresher courses in the mix). College doesn't disappear forever the day you enter the draft.

So what kind of a measurement do you need to gauge whether to temporarily drop out of school or not? Opportunity cost. For 99.999% of people, the lost opportunity cost of leaving school without their degree makes staying in school a good decision. The number of years you decide to take off is exactly how many years you are going to be behind on the career seniority and pay scale ladder along with potential missed opportunities down the road due to being lower on the ladder (although the degree related job itself will generally be there for the foreseeable future). Essentially, you're passing up your long term implied odds.

College athletes, however, are facing a reverse implied odds situation because their job may not be there in the future due to the possibility of running into a career ending injury before they even get there. If you would be offered the choice of staying in school vs a million dollar professional contract, how low would the chance of injury in your senior year have to be to turn down the million dollars now? Even a 3 to 5% chance -- which I think is accurate considering how many 20 year careers are out there -- resulting in an EV of degree + $950k 1 year later vs EV of $1MM now is too high. The degree is certainly not worth $50k especially when you consider the utility of $1MM nevermind the potential implications of tens of millions of dollars in the future and the opportunity itself being extremely rare. The degree in comparison is relatively worthless considering the assumption that you can always go back if things don't work out while having a mountain of money to fall back on. This is essentially a reverse opportunity cost situation.

I'm in my dorm spinning in a chair taking props on how long until I pass out. The prop on how many Big Macs I can eat while doing this is already over. In walks Bill Gates looking for smart people. I don't know what he's doing here. He says "Hey, you would be an interesting sideshow for my employees. How about I pay you $100k to knock yourself out for the next year?"

My degree is going to get me an entry level job at $80k with a pay scale range upwards of $250k within 8 years. So I tell him to gtfo since I can't pass up my career opportunity cost. If instead, Bill Gates walks in and offers me 1 billion dollars with additional info that he will find someone more ridiculous than me in the next year 10% of the time, I say I will spin 24 / 7 / 365 starting now while passed out even if there's a 40% chance I die in the process, no problem. This indicates that at some point in between those offers, this becomes an easy decision because of the fact that I'm being offered the utility of life changing money that may not be there in the future.

Moral of the Story:
If you're ever faced with a situation where you're being offered guaranteed life changing money now with any chance of reduced future prospects if you defer, don't be an idiot. Take it now. If you're on Deal or No Deal with $800k, $400k and $1 cases left being offered $350k by the banker, don't be an idiot and say "Well my EV is $400k No Deal!" Take the money. You're not running this twice and you only get to play this hand once in your lifetime. If you're a college athlete being offered a pro contract before graduation, take the money.

Finishing your accounting degree so you have an $80k 9-5 to fall back on while adding 5% risk to your million dollar contract plus future earnings is just plain stupid. On the flip side, taking the million dollars now so you have a million dollars to fall back on in case you have to go back to that $80k 9-5 is perfectly logical. Common logic applies to common situations. Uncommon situations require you to actually think.

This is somewhat ironic because common situations are actually relatively close decisions while uncommon situations are very easy but apparently counter-intuitive to a lot of people.

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