Using Behavioral Economics to Predict the Future of Education

With all the excitement around MOOCs, such as those offered by Coursera and EdX, and free lessons like Khan Academy and Codeacademy, many people wonder what will happen to traditional universities. Some educators fear that these free online courses may destabilize the education industry. But as with Mark Twain’s famous quote, the reports of the university’s death are greatly exaggerated.

First, consider how poorly MOOCs retain their students. Research shows that MOOCs have dropout rates hovering around 90 percent, and completion rates averaging about 13 percent. Compare these statistics to the national averages: 22 percent of students graduate from for-profit colleges, 55 percent at public institutions, and 65 percent at private nonprofit colleges.

So what does it all mean? The science of behavioral economics offers a few clues. I think a large part of the answer lies in a psychological phenomenon called the IKEA effect. The IKEA effect says that, “When people use their own labor to construct a particular product, they value it more than if they didn't put any effort into its creation, even if it is done poorly.” In other words, one reason why students don’t complete MOOCs is that they did not have to physically invest as much in the course (dealing with traffic, finding parking, walking to class, engaging in discussions, etc.) and so they perceived the free online courses as having lower value, making it easier to drop out or do less work.

When we look at costs, we can see a similar effect with the theory of loss aversion. Loss aversion “refers to people's tendency to strongly prefer avoiding losses to acquiring gains.” In this respect, students would be more worried about losing money than about gaining a degree, and the greater the costs of that education, the more likely students would be to continue. If we compare traditional community colleges, state colleges and universities, and private nonprofit colleges, we can see that the greater the costs, the higher the completion rates – 45, 55, and 65 percent, respectively.

So we can make a broad generalization. The more an online course costs, the better completion rates it will have compared to cheaper courses; the more physical effort a student has to put into a course, the higher the completion rate compared to courses that require less physical investment.

This generalization also gives us some ideas on how to improve online schools and courses. If they are free, start charging. If they already cost money, then we must get students to engage physically with their courses, thereby increasing its perceived value.

Just as the emergence of online colleges in the 1990s has not significantly eroded more traditional brick-and-mortar schools, neither does the emergence of free MOOCs threaten traditional institutions. All things being equal, the psychological and behavioral aspects of perceived value tell us that these institutions will continue to be around for a long time to come.

Written by Michael Sherrillo
Michael is a Matriculation Coordinator with Ashford University blog.

Questions? Talk with an Advisor