The role of heterogeneous risk preferences, discount rates, and earnings expectations in college major choice

Abstract

In this paper, we estimate a rich model of college major choice using a panel of experimentallyderived data. Our estimation strategy combines two types of data: data on self-reported beliefs about future earnings from potential human capital decisions and survey-based measures of risk and time preferences. We show how to use these data to identify a general life-cycle model, allowing for rich patterns of heterogeneous beliefs and preferences. Our data allow us to separate perceptions about the degree of risk or perceptions about the current versus future payoffs for a choice from the individual's preference for risk and patience. Comparing our estimates of the general model to estimates of models which ignore heterogeneity in risk and time preferences, we find that these restricted models are likely to overstate the importance of earnings to major choice. Additionally, we show that while men are less risk averse and patient than women, gender differences in expectations about own-earnings, risk aversion, and patience cannot explain gender gaps in major choice.

The Returns to College Major Choice: Average and Distributional Effects, Career Trajectories, and Earnings Variability

“…Distributional effects also are more difficult to communicate in a salient way to prospective students. Zafar (2015, 2021) and Patnaik et al (2022) show that students' major choices are responsive to information on mean returns and other potential non-earnings returns.…”

Workers’ Perceptions of Earnings Growth and Employment Risk

“…Students' earnings expectations have also been found to vary systematically across majors, and are consistent with income sorting in the choice of majors. More generally, evidence indicates that earnings expectations are a significant predictor of education decisions Schweri and Hartog, 2017;Kaufmann, 2014, 2017) as well as college major choices (Arcidiacono et al, 2012;Zafar, 2013;Zafar, 2015, 2021;Patnaik et al, 2020).…”

Rich Grad, Poor Grad: Family Background and College Major Choice

“…While expected earnings are an important component of the major choice for many students (Arcidiacono, 2004;Conlon, 2021;Patnaik et al, 2022;Wiswall and Zafar, 2015a), other factors such as parental approval and enjoying coursework also matter (Zafar, 2013).…”