Using the human capital model, supplemented by a preference framework focusing on utility maximization, this paper examines the decision making process of the individual when considering enrollment in higher education. The study applies a theory of herding behavior to the investment decision, arguing that individuals use the decisions of others who have gone before them as signals to reduce information costs and to aid in their own decision making process. The paper further discusses the possibility of this behavior leading to irrational investment decisions. Herding behavior will likely lead to an increase in the supply of highly educated workers, perhaps to the extent that the supply exceeds the demand. As a result, it is hypothesized that this phenomenon will yield a decrease in returns on the investment in higher education. After a literature review, the hypothesis is empirically tested by examining the earnings difference between individuals who have obtained a bachelor’s degree and those who have earned higher degrees. The Oaxaca-Blinder decomposition procedure is employed to gain insight on the payoff of pursuing higher education in the face of increasing student enrollment. Although the results do not provide evidence in support of the hypothesis, a discussion on how they may still reflect irrational decisions is provided.
French, Amy K., "Does the Trend Need a Mend? The Effects of Herding Behavior on the Returns to Higher Edcuation" (2014). Senior Independent Study Theses. Paper 6008.
Social and Behavioral Sciences
Bachelor of Arts
Senior Independent Study Thesis Exemplar
© Copyright 2014 Amy K. French