Life's biggest decisions can at times seem overwhelming, and many are made when we're still young: What career path to choose, who to marry, whether to have children.
Those are three of the choices highlighted in “The Five Life Decisions,” a new book explaining how basic economic principles can help us make sense of life's most difficult choices.
Robert Michael, author of the book, joins host Phil Ponce to share his insights. Michael is the founding dean and professor emeritus at the Harris School of Public Policy Studies and a senior fellow at the National Opinion Research Center, both at the University of Chicago.
Below, some highlights from our conversation.
On deciding to pursue higher education:
“You spend money on tuition and books and you spend time, which has a big cost to it. So there’s a substantial expense to getting an education as everyone knows. The rate of return to an investment in a college education is about 10 to 15 percent and that’s a terrifically good rate of return,” Michael said.
“But unlike a stock, an investment in human capital is one that you can’t get rid. You can’t sell it off if you decide later you don’t want it. That’s typical of the life decisions we’re talking about in this book.”
On deciding to marry and build a family:
”A household is like a little firm,” Michael said. ”You’re a CEO making decisions about producing a whole lot of things. You cook your dinner because you have some capital equipment in your kitchen – a skillet, a stove. You have some raw materials that you went out and bought at the grocery store. You have some production technology called a recipe and your own skills. You put it all together and you produce something. That’s the same as a firm. You can do that alone and you can do it okay, but if you do it for two or three people it’s more efficient.
“It’s also the case that if you’re going to do it with somebody, it matters who you do it with. All kinds of issues that firms involve are involved in the decision in choosing a partner: complementarity, substitutability. Is it better to form a partnership with someone just like you or just unlike you?”
Below, read an excerpt from Chapter two of “The Five Life Decisions.”
UNCERTAINTY AND RISK
Something that makes the choice about going to college a bit scary is that you don’t really know just what the experience will bring or just how it will affect you. There’s a lot of uncertainty surrounding the decision. In fact, there is generally a lot of uncertainty surrounding most of the big decisions in life—where to live, with whom to live, what sort of job to seek, what sort of groups to join, if you should have children, and on and on. Uncertainty is, unfortunately, a fact of life. One of the main challenges of becoming a mature and responsible adult is learning how to deal with it.
The first point to remember about uncertainty is that it’s not a good strategy to avoid making decisions because of it. On the other hand, it’s also not a good idea to ignore uncertainty when it’s there. There are many degrees of uncertainty—some things are only a little bit uncertain, while other things are wildly uncertain. Similarly, some uncertainty matters a lot, and some doesn’t really matter so much. In terms of steps you can take when faced with uncertainty, there are three useful strategies: (1) you can do things that will help you understand and assess the uncertainty; (2) you can often take steps to actually reduce the uncertainty; (3) when you can’t reduce the uncertainty further, you can frequently take steps to minimize its impact.
Take a pretty simple example first: suppose you are considering buying a used car from a neighbor. Since it’s a used car, the uncertainty lies in whether it will run dependably. To address this uncertainty, you can (1) get a better idea of the amount of uncertainty by asking a lot of questions about the car’s history: Has it ever been in a major accident? Can you see its service records from the dealer’s checkups and repairs? That way you can acquire information that will let you know about the uncertainty you face with that car. You can also (2) take steps that can actually reduce the uncertainty by asking the neighbor to have the car serviced and those tires and brake linings replaced before you buy it. Finally, you can (3) protect yourself from the risk of a bad outcome by buying some insurance or taking out a warranty guarantee against some of the things that might go wrong with the car.
These actions are likely to affect the cost somewhat, but it is often prudent to spend some money now to lower the risk of a later outcome that can be much more costly than the cost of searching for and fixing problems or insuring against that risk. (This touches on our earlier discussion of time preference.)
When it comes to the choice about more schooling, there’s uncertainty about a lot of different things. You can search for information about the schools of interest to you. You can find out what programs they offer, what the schools will expect of you academically, what sort of students your classmates will be. You can look into possible fellowships or internships that can offset some of the costs, et cetera. You can also get information about the training program or the college major you are considering.
Beyond looking into potential schools, you can find information about the nature of jobs that require various skills, what they pay, how much turnover there has been in those jobs, where those jobs are located, how easy it is for workers with the skills you are considering to find jobs, and so forth. You can also set up informational interviews with representatives of the firms you might like to work for to determine what suggestions they have about relevant training programs. You can ask which schools they hire most new workers from.
For every piece of information you get about the various elements that are uncertain, the better equipped you’ll be in making the decision about the right level of schooling, the right school, and the right concentration or major for you.
Excerpted from “The Five Life Decisions” by Robert T. Michael. Reprinted with permission of The University of Chicago Press.
More stories about new books:
Aug. 9: A new memoir tells the story of a young mother separated from her husband during the Nigerian civil war in the 1960s. Hear how she protected her family, including future Chicago Sun-Times journalist Maudlyne Ihejirika.
July 13: Anger is everywhere. A new book looks at anger from ancient times to current politics. A conversation with the author of "Anger and Forgiveness."
July 11: The new book "Disco Demolition: The Night Disco Died" explores the notorious history of the "Anti-Disco Army" – a rebellion that led to chaos at Comiskey Park and a forfeited game for the Chicago White Sox.