Prospect theory & the panopticon of debt

Last night, after Nick Clegg's semi-apology over student loans (see comedy version with honesty subtitles below), I got involved with a twitter chat with an economist from Demos. He argued (very intelligently) that the loan scheme would actually save the tax-payer $2.5K per student, and that it should be viewed as a progressive tax, and not debt.

I don't know enough about economics to really counter his claim about the savings. It certainly appears that the Coalition were caught out by all universities charging the full fee, which would suggest it isn't being quite the financial success they had envisaged. But the fact/misleading rumour that it was unaffordable was only ever an extra insult/icing on the cake to what was generally perceived to be a damaging policy to higher education. "You've done all this damage, and it's worked out worse than the old scheme anyway" was the cry.

Let's accept for now then that it could theoretically save money in the long term. This doesn't mean it won't severely damage the higher education sector. And here I do feel on firmer ground, because economists (particularly free market ones) tend to ignore those pesky humans in the mix and assume a rational market.

I would like to propose two psychological factors that will come in to play, which I don't think have been modelled in any government plans.

Slot Machines

Prospect theoryTversky and Kahneman conducted a series of influential experiments in the 70s which demonstrated that people give loss more psychological weight than gain – put bluntly losing £20 has more significance than finding £20. People then adjust their behaviour accordingly – they are risk averse. 

In our case this means they will perceive the student loan as debt, and that debt will weigh more heavily than the potential gain of a good job, a rewarding time, or future earnings. They will thus behave appropriately, with two courses of action:

a) Risk aversion – they don't go to university in the first place and take on the debt. This harms the higher education sector.

b) Risk reduction – they act as if it is current debt and seek to pay it off. This harms society more broadly, for instance, they avoid taking on more debt in the form of a mortgage thus impacting the construction sector.

This won't affect all students, just as some people are more risk averse. Some will judge it a risk worth taking and study anyway. Tversky and Kahneman also talk about the 'Value function", whereby the difference in loss between £100 and £200 is seen as greater than the difference between £1100 and £1200. This would suggest that the impact will be felt most keenly for those from less well-off backgrounds as the potential debt is perceived as a larger part of current wealth, it is a bigger risk

It would take a big research project to estimate the impact of this factor on student behaviour, so for now let's take a figure of, say, 20% fewer students applying, given that is a strong psychological factor found in many instances.

the singing ringing tree | Panopticons

The panopticon of debt – the second factor is that of the panopticon. Taken from Bentham's proposal for prison design and adapted as a metaphor for society by Foucault, the panopticon suggests that when all prisoners/citizens can potentially be observed all the time, they act as if they are. As Foucault puts it:

"He who is subjected to a field of visibility, and who knows it, assumes responsibility for the constraints of power; he makes them play spontaneously upon himself; he inscribes in himself the power relation in which he simultaneously plays both roles; he becomes the principle of his own subjection"

It doesn't matter that they aren't observed all the time, the knowledge that they could be makes them act as if they are. I would suggest future debt acts in a similar way. The knowledge that it could become debt and be paid off makes people act as if it is current debt, even if they never had to pay it off (because their earnings didn't reach a certain level). As with prospect theory the impact of this factor is likely to be felt more keenly in some sectors. Some prisoners in a panopticon prison will calculate the probability of being observed at any one time and overcome their fears, others won't.

This transfers the debt from a national one to an individual one, and at this level its impact is more toxic in the economy. The outcome will be the same as for prospect theory: a reduction in numbers applying and a reduction in spending from those coming out the other end.

Again, knowing the size of the impact of this factor would take more research than I can put into a blog post. But let's say it adds another 10% to our previous 20%, giving a total reduction in student numbers of 30%. Like the impact of these factors, it would not be evenly distributed, so Russell Group unis might see no decline at all, while others might see a drop by as much as 50%. This would surely send some under.

Now, it may be that we think a 30% decrease is desirable, that the higher education sector has become over-crowded. But it would be better to state this as an aim, and to work towards it (universities could do better planning then), rather than hope it occurs as the result of an unpredictable system. It would be interesting to know if any of these factors were considered when modelling the future of higher education? 


  1. “losing £20 has more significance than finding £20”
    So how do you explain the National Lottery?

  2. mweller says:

    They cover this in prospect theory – the investment is low against a possible (over-estimated) large outcome and it is phrased as possible win. If you rephrase lotteries as about losing then fewer people partake in them.

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