Are the Poor Underestimating Returns to Education?

I just found this interesting tidbit from a paper I was reading last night that shows how teenagers in developing countries literally tend to underestimate the returns to education. Researchers asked students about how much more educated people earn compared to uneducated ones and found that they substantially underestimated the amount. More importantly, informing them about the true difference increased their likelihood of staying in school:

Jensen recently carried out a randomized experiment in which he gave secondary school students in the Dominican Republic information about how much more money an educated person makes compared to someone who did not get an education. He found that teenagers substantially underestimate the returns to education, and that providing them with this infor mation had a substantial effect on the children’s likelihood to stay in school. In the treatment group, children were 5 percentage points (an increase of 10% since only 50% return) more likely to come back to school the year after the intervention.

Before you think that this is somehow limited to the Dominican Republic a similar result was found in Madagascar where parents were more likely to keep their children in school upon being given similar information:

These results are confirmed by recent work from Nguyen, who provided parents in Madagascar information about returns from primary and secondary education. There, too, many parents underestimated the returns from education, and when they were informed about the measured returns reacted by making sure that their children went to school more regularly. At the end of the year their grades were also better.

This is one powerful illustration of how people often lack critical information that can improve their future choices. It is also a good indicator that giving people more and more choices without the necessary mechanisms for choosing between them will not necessarily produce the expected return.