A reader just sent me this email about signaling with the CFA. Reprinted anonymously with his permission.
Dear Professor Caplan,
I’ve greatly enjoyed reading your EconLog posts and The Case Against Education, and I have a story about signaling from the world of professional certification that might interest you. Specifically, it relates to the Chartered Financial Analyst (CFA) program.
Although I never studied economics or finance in college, I’ve just started working as a quantitative analyst in the financial services industry. Luckily, I became well-acquainted with methods that are useful in quantitative finance (e.g., optimization, partial differential equations, and stochastic calculus) as an undergraduate math major.
I tried out several areas of applied math in graduate school, but never quite settled into a comfortable niche. So, after searching for a career where I could use those aforementioned quantitative methods on a regular basis, finance seemed like a suitable option. The only trouble was that I didn’t have any job experience or certifications suggesting an interest in finance.
In order to prove that I was committed to pursuing a career in finance, I signed up for the CFA program; after I passed the first exam, I noticed a sizable uptick in interview requests and eventually accepted an offer to work for a large financial services company. It’s safe to say that if I had never signed up for the CFA program, I wouldn’t have my current job.
Yet, the time commitment demanded by the CFA program – the CFA Institute, which administers the program, recommends at least 300 hours of studying for each of its three exams – seems to be almost worthless in light of my actual job responsibilities.
The mathematical models that I’ve been using since starting my job are significantly more complex than what is presented in the CFA curriculum. Corporate finance, financial statements analysis, and most other topics covered in the exams are entirely, or almost entirely, irrelevant to my work.
Even though I would like to stop working towards a credential that won’t improve my job performance, I’ll stick with it for two reasons. First, it is generally expected that anyone working in qualitative or quantitative portfolio management becomes a CFA charterholder; in line with this expectation, at least half of the people I work with on a regular basis hold the CFA charter. Second, and more important for my career prospects, the CFA charterholders I work with are disproportionately concentrated in management positions.
On a performance basis, my decision to continue the program seems like a standard example of the sunk cost fallacy in action – or attributable to any number of behavioral biases. However, the signaling effect of becoming a CFA charterholder, in terms of credibility and promotion potential, would seem to make the investment worthwhile.
Regardless, I greatly appreciate the work you’ve been doing to highlight how signaling can explain a substantial part of the return to education. Hopefully, credential inflation will abate before a majority of janitors have bachelor’s degrees.
Best,
[redacted]
READER COMMENTS
Steve
Oct 2 2018 at 7:35am
and don’t even get me started on actuarial exams…
JFA
Oct 2 2018 at 9:07am
Bryan,
The CFA exam should make you adjust your probabilities when making bets on the future of education because it seems to be a low cost competitor to other degrees and certifications. The Economist ran a series of articles on the CFA a few years ago touting it as the thing employers would want because the MBA had become meaningless. The thing about the CFA is that it is much less costly (both in money and time) but seems to send a pretty strong signal because the pass rates for each exam (there are 3) are low. In June 2016, for exams 1, 2, and 3 the pass rates were 42%, 46%, and 53%, respectively. . Is it a replacement for undergrad? No. But that the CFA is seen as a legitimate alternative to an MBA is encouraging.
Michael
Oct 3 2018 at 3:38am
I work in derivatives at a large bank. I’ve hired CFAs and sponsored staff through CFAs. Many people have the opposite problem from your correspondent: the CFA is more technical than their actual jobs. In my view it is better than most alternatives: it does give a good and reasonably rigorous overview of different aspects of finance, which is useful to have as you progress through career. A lot of people have very narrow understanding of their jobs, which can limit effectiveness. Smart and curious people can overcome that, but CFA is a structured way of getting broad understanding.
That said, I mostly agree with your correspondent. Professional credentialism is getting out of hand, and CFA has become an expectation even where it’s really not needed. There is also pressure from regulators to prove we have adequately skilled staff … by forcing people through professional exams that they don’t need.
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