As part of a recently completed Corporate Finance course, I learned a simple rule about investments: invest in a project or opportunity if the Net Present Value (NPV) of the project’s future cash flows is positive. Jargon aside, the basic idea is that you accept investment opportunities that make more than they cost in present terms. While emphasis was placed on the discounted cash flows of an investment, we learned how it is also critical to understand the opportunity cost of taking on an investment. In other words, to make a good decision on an investment, you must also consider the value of alternative uses of your time, resources, and capital.
This is where things got interesting as I considered this Net Present Value rule and the notion of opportunity cost in relation to my work with young people. And, since business is more invested in education than ever, it seemed worthwhile to apply a different business analytic to education.
When we ask young people to invest in education, we often entice them using the future cash flows resulting from that investment (citing stats like a college graduate will make $1 million more over their career than a high school graduate. We’ve all seen the posters; I even have one up in my office!). And, positive future cash flows can certainly be a powerful and motivating idea and a symbol of a “better future” or of a “successful life”. Alternatively, however, when we make this appeal and assume that the “right” answer is inherently to make the investment because of future returns, we fail to acknowledge adequately the time value of money as well as the opportunity costs associated with staying in school, especially for young people living in poverty.
So, should they invest?
What is the net present value of an investment in high school for a young person who knows she cannot go to college (or has just been told so many times that she believes it!) and who, even with a high school diploma, will vie for the same low-wage job she could get if she dropped out at 16? By staying in school today, she actually loses the present cash flow at the job as well 2 years of seniority! NPV is negative.
What is the net present value of a post-secondary education, the financial benefits of which a student may enjoy at 23, to a 13 year old who never really expects to live beyond 20? Or, perhaps expects to be in prison by then? (Ask around and you might be shocked by how many of our young men have this perspective!) For him, there are no future cash flows to consider. NPV is zero today, and increasingly negative as he invests.
Finally, what is the net present value of a post-college salary to a 15 year old who, by trading those future earnings, can use her small amount of minimum-wage cash today to help keep the lights turned on, provide a growing sibling with adequate clothing, and keep some amount of food on the family table? What is the opportunity cost of not covering such basic needs? Incalculable. So, no future earnings can offset the present opportunity cost. NPV is itself incalculable.
When these young people disinvest in education by dropping out of school, we wonder why? They must be lazy or irresponsible or unmotivated or short-sighted or lacking judgment or any other of the litany of attributes we apply to dropouts. But, let’s be honest, what would we do? How would we invest? By economic standards, their disinvestment proves them to be the textbook rational investor. The value proposition does not resonate with their needs or meet their required rate of return, so they don’t invest. (Remember: Don’t think education as a value; we are talking investment here!)
And, the increasing opportunity costs of public education are not only a function of poverty. Via technology, young people have more access to more opportunity, more relationships, more content/information, and more engagement outside of school than ever in history.
In a recent professional development workshop in Wisconsin, a teacher and founder of a new charter school described how his high school students (and colleagues) hit the school doors at the end of the school day with cell phones in hand as if they were finally breathing oxygen-rich air after hours of deprivation; finally reconnected to the world; desperate to catch up on what they had missed; engaging the tools, the information, and the communications that define their lives everywhere but inside the school building. This teacher’s students and colleagues alike are sacrificing critical social, cultural, and technological tools, relationships, mobility, and interaction for hours of one-way communication, analogue information, fluorescent lighting, beige walls, and sitting in desks. (I am being a bit dramatic here, but you get my point.)
Although described in slightly different terms, this educator’s realization was that he is working with and against an opportunity cost of education the likes of which no previous generation has ever had to consider.
So, as we move forward in education reform, we certainly need to keep our eye on improving our product and our sales tactics. We must continue to encourage young people and families to invest. But, we also must understand and address the opportunity costs of the investment; we must lower the cost. We have to work with our young people to better understand their lives and their basic physical, social and emotional needs. We have to reduce the cost of spending a day at school when life continues to pull them out; we have to keep them connected and supported. We must capitalize on their various learning styles, expectations, and technological preferences. And, we have to create communities and community support systems whose values and practices align with such educational shifts.
I obviously don’t pretend that this is a small task, but until we pay attention to the opportunity costs of education, we will continue to run schools and manage classrooms fueled by inertia and defined by the needs and desires of the system while the value gap between our product and our investors continues to grow even wider.
* For the purposes of this blog, I am using “education” and “going to school” interchangeably. The distinction is critical but that analysis is for another blog.