Understanding the Investment Characteristics of the Education Decision and the Need for Parental Involvement in Decision Making

This excerpt is from the book, College Majors Handbook with Real Career Paths and Payoffs, Second Edition, by Neeta P. Fogg, Ph.D., Paul E. Harrington, Ed.D., and Thomas F. Harrington, Ph.D. (2004) pp.4-5. Reprinted with permission from the publisher, JIST Works, Indianapolis.

Most day-to-day decisions that youngsters make are what economists think of as decisions about consumption. Consumption can be thought of as simply paying the cost for a good or service and receiving all of the benefits for that good or service immediately. There is no temporal difference between when the costs are paid and the benefits received. A good example might be the purchase of an ice cream cone. On a hot summer afternoon we might buy a double Rocky Road. When we purchase our cone from the vendor, we pay the costs at the same time that we receive the benefits of the purchase. An important implication of this is that we know with a high degree of certainty what the benefits of the ice cream cone are when we make the purchase. This means that there is relatively little risk associated with a well-informed consumption decision. When we buy the cone, we are pretty certain of what we will receive in return.

A second key category of household spending is investment goods or services. These differ from consumption goods and services in many important ways. The critical distinguishing factor between consumption and investment is time. Unlike with consumption spending, the costs and benefits of investment spending are not closely connected in time or even necessarily in space.

Investment occurs when current consumption is sacrificed toward the purchase of a good or service that is expected to yield a higher level of benefits in the future, which frequently accrue in the form of higher future income and therefore higher levels of future consumption. While many adults understand the idea of deferring current consumption for higher future consumption, it may not be an idea with which most adolescents are familiar. An 18th-century economist noted that current consumption confronts our senses, while future consumption can only be imagined. Because of their limited life experiences, adolescents may have a more limited ability than their parents to imagine the gains from delaying the gratification of their current consumption desires. This is one reason why parental involvement in schooling is so important. Middle and young high school students may have less understanding than their parents of how the abilities they develop in school will make a difference in the long run. Fundamentally, adolescents seem to have limited ability to look into the future, at least compared to parents.

Perhaps the reasons that parents better understand the difference between consumption and investment is that investment, by its very nature, involves a degree of uncertainty and therefore risk. Because the benefits of investment, by definition, occur in the future, it is not certain that they will occur at all or that all of the anticipated benefits will be produced by the investment activity. There is only a chance or a probability that the expected benefits of an investment will actually materialize. Parents, largely through observation and experience, have a better notion than children of the uncertainty and risk associated with an investment activity, thus placing them in a better position to make investment decisions, which are usually more sophisticated than consumption decisions. For most people, especially adolescents, the preference is for current consumption. Part of being a responsible parent means pushing children to forgo current consumption (such as watching television or playing video games) to engage in activities that are investment-like in nature (for example, studying and doing extra work at school), as they are expected to yield gains in the future that exceed the value of forgone current consumption.

Direction. Decisions. Satisfaction.