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Ballparking the value of a skill

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Some types of knowledge and skill deliver enduring human capital: they provide machinery for understanding and navigating the world and making decisions that, in the aggregate, affect one's life outcomes considerably. Other types of knowledge and skill deliver little human capital. This page considers the puzzle of how one might ballpark the human capital value of a skill.

Of course, the human capital value of a skill is not the only consideration when determining whether to acquire it. The cost in time and money, as well as other gains from acquiring the skill, including signaling gains and consumptive benefits of the learning process, need to be factored in.

How to do it

The key idea is that the value of a skill is determined by how frequently one uses it and the value of each instance of using it. This value could be measured:

  • via upside (what's the most one can gain from using the skill): This framing is used when the skill helps with an optional choice.
  • via downside (what's the most one can gain from not using the skill): This framing is used when the skill is necessary for an action one needs to complete.

The underlying idea is that beliefs should pay rent in anticipated experiences.

Reading and writing: a worked example

We keep hearing of how it's important to be able to read. But why is it important? One way of trying to judge the importance of our reading ability is to measure the extent to which individual steps in our regular, daily lives depend on our reading skills. A slight variant is to imagine how an illiterate person might navigate life in our place.

Illiteracy can be thought of as selective blindness – blindness to street names, to road safety signs, to store signs, to brand names on items at the supermarket, to restaurant and cafe menus.

  • Illiteracy significantly affects one's ability to travel to new places. Illiterate people can do fine navigating known geographic regions, drawing on their familiarity with the terrain. But it can be much more cognitively stressful for them to venture out into new areas on their own. They cannot understand maps too well, and cannot read street names and road signs. This means they need to memorize long lists of oral directions (or use diagrams, but even here, they need to have the skills of translating a geographical map to a two-dimensional diagram). Even though people can ask around for directions, it can be embarrassing to do so repeatedly.
  • An illiterate person would have more trouble navigating a new restaurant or cafe. Because of difficulty reading menus, he or she would need to ask other people to read out menu items and prices. This can be socially embarrassing. To avoid embarrassment, the person may just end up ordering a standard item with a high probability of availability and whose cost would not be too high. Similarly, it would be difficult to identify brands of items at a supermarket, or even figure out what types of items are in what aisle. Again, the person needs help navigating the supermarket. The person may not be able to read expiry dates and therefore may need assistance from others even for such mundane tasks.
  • An illiterate person has difficulty reading instructions for hardware assembly, cooking, machine repair, and many other mundane tasks. The person has trouble reading dosage instructions or ingredient details for medicine and food items. Again, these are non-issues as long as the person sticks to standard items or asks other people. But this does reduce the person's ability to experiment or cope with new situations, and the need to constantly ask others for help can be an embarrassment and make one dependent on others.
  • Illiterate people cannot use text-based communication. For instance, text messages through mobile phones and the Internet are often cheaper and more effective means of communication than voice communication, particularly for asynchronous or one-to-many communications. But lack of literacy means that this option is foreclosed. It also means that others cannot communicate with the person in this manner.
  • Illiterate people cannot read the newspaper or other basic information sources (like Wikipedia) and therefore have to rely on information filtered through other individuals, who may not be in a position or mood to help them, and/or have a vested interest in providing inaccurate information.

Academic skills that have relatively direct, immediate application in day-to-day life

  • Reading:
    • Reading letters and words
    • Reading sentences
    • Reading paragraphs
  • Writing:
    • Writing words, including names
    • Writing sentences
    • Writing paragraphs
  • Basic arithmetic:
    • Counting, reading numbers in base ten
    • Addition and subtraction
    • Multiplication and division
    • Concepts of fractions, ratios, percentages, decimals, and negative numbers
  • More advanced
    • Written composition, editing, reformulating and expressing oneself well
    • Basic algebra
    • Functions and graphical representations (precalculus)
    • Basic statistics

In general, the more basic a skill, the higher the value of learning it well, and the greater the return per unit time invested in learning it.

For instance, an overwhelming majority (99%+) of people in the developed world can read words and simple phrases, and their ability to do this affects their ability to follow road signs and street names, thus providing the minimum literacy threshold needed to drive easily through new terrain, shop at supermarkets and eateries, follow simple instructions for do-it-yourself assembly, food preparation, or taking medicine doses, etc. People often mess up these activities, but they can still do them reasonably well a reasonable fraction of the time.

The ability to understand complicated sentences, on the other hand, delivers little marginal benefit. Rarely does your ability to use a public transit system or drive rely on your ability to read a sentence such as the ones on this page! Occasionally, complicated sentences do get used in public transit, such as "Due to an overcrowding issue, we will be switching the train to the left track, and therefore doors will open on the right instead of the left." But the train operator will probably repeat the important part "doors will open on the right instead of the left" a couple more times so that people who were confused by the original sentence grasp the important point. And even if they don't understand, they will still see visually that doors are opening on the right instead of the left.

Do high-level skills ever get used?

Is there any value to the type of skills people learn in high school and college? Can you envisage any situation where such knowledge would affect one's decision?

The answer is a qualified no. There are some exceptions, but there is a strong presumption of uselessness of most material learned in high school and college:

  1. There are rare situations where a job directly uses an acquired skill. For instance, a programming job directly uses knowledge of programming syntax and programming practices.
  2. There are other situations where, although a job does not require a particular skill, having that skill allows one to do the job better because one is able to see patterns that others cannot identify. Commentary on social policy may benefit from a deep understanding of mathematics that allows one to understand various quantitative indicators of the social policy, even though one can make crude first-pass analyses with a minimal knowledge of mathematics.

(1) is relatively rare: most people do not take up jobs that directly apply the knowledge they have gained. (2) is also rare in practice. The reason is that to get to the stage where one can do (2), one has to understand material really well, far better than the level that is needed to do well in school.

For instance, if one has a strong intuition for different types of growth functions (linear, quadratic, exponential) then one can understand relevant patterns in growth trends, identifying when a particular growth pattern comes closer to linear, quadratic, or exponential, or understanding the implications of exponential growth. But this requires a broad-based qualitative understanding that goes beyond what is taught and tested in courses.