Educational paths, student loans, and "many eggs in one basket"

[ucbalumnus]

There is this web page:

The mathematical case against blaming people for their misfortune | Psyche Ideas

It includes this:

@David Kinney in Psyche / Aeon

By investing so much of his worth in a taxi medallion, Chow put all his eggs in one basket. So, you might say, he made himself particularly susceptible to ruin. What individuals should do instead, perhaps, is pursue a diverse range of offsetting strategies that eliminate or drastically reduce the risk of catastrophe, even under conditions of severe uncertainty.

The problem is that much of economic and social life in affluent countries is structured to require individuals to commit most of their resources towards one strategy for pursuing a flourishing life. Taking out a student loan or mortgage, or buying a taxi medallion, are all strategies that require a large, if not total, commitment of a person’s financial resources. Here, real hedging would require us to start from a place of considerable wealth, and so it isn’t a viable strategy for many. Most of us remain consigned to placing big bets in a casino where it’s effectively impossible to know the underlying odds.

Note that taking a student loan is one of the examples of a large bet putting lots of eggs in one basket. In the context of these forums, choosing an educational path and a career path could also be such high stakes bets, since they require considerable commitment (e.g. years of education) to a future of unknown odds. As the nature of labor can change quickly (i.e. some types of jobs become obsolete while others get created), many years of education leading to a type of job that gets obsoleted end up becoming useless, and it may take years of education to retrain for a new type of job, which itself may have an uncertain future.

Perhaps anxiety about this type of thing may be driving some of the increased competition to get into colleges or popular majors that are perceived (not necessarily always correctly) to be more favorable high stakes bets for career paths.

[EconPop]

I don’t look at it as “Chow put all his eggs in one basket.” I look at at it as Chow had three eggs. He used two to support his family, and put his only remaining egg in his entrepreneurship basket. It was the only option he had available.

That article and your statements remind me of another situation.

A couple of years ago, I was in a discussion with people who were investing in various entrepreneurship activities. There were two distinct camps when it comes to contingency funds.

One camp said you needed at least 20% of the overall budget set aside for a suitable contingency fund. Others said that they’d spent years saving for the basic cost of starting the project and that waiting until they had 20% more was not a realistic option. Basically it was a disagreement between people with wealth, and people looking to escape a comparatively low-income life.

The wealthier group couldn’t understand why anyone would go into such a venture without “setting aside” the requisite contingency fund that would help ensure success. The lower-income group couldn’t understand why the wealthier group was insisting anyone who went into such a venture without the 20% contingency fund was being foolish and setting themselves up for failure.

As the discussion continued, it became obvious that the two sides had blind spots in their perceptions. For the wealthy side, the answer to every problem was more money. For the lower-income side, extra money to throw at life’s problems was an unaffordable luxury and not a realistic plan to overcome many of life’s obstacles.

For instance, if a wealthy entrepreneur needed a new grill for a restaurant, they might call a supplier and write a $15K check and wait 3 days for delivery and installation. However, a low-income entrepreneur might scour Craigslist posts and find a used grill 500 miles away, ask a cousin (who owns a truck) to drive with her to go pick it up, spend a week cleaning it and asking a friend (who is a carpenter/handyman) to help install it at a “friends & family” discount, all for a total of $4K.

The lower-income entrepreneur might not have the cash contingency fund, but that doesn’t mean she can’t handle unforeseen events. She’s had a lifetime of coming up with alternative solutions, a lifetime of building her fortitude and perseverance. Extra money makes solutions easier, but extra money isn’t always the only solution.

The same disconnect often appear in perspectives here on CC.