2020-11-19

Lambda School's Incredibly Naive Incentive Alignment

Lambda School is the most incentive-aligned education in the world.

It is so incentive-aligned, that their fundraising announcement was titled “Lambda School Raises $74 million for Incentive-Aligned Education”. Another blog post, tilted “Taking Baby Steps Toward Incentive-Aligned Higher Education and Job Training” includes the phrases

With incentive alignment, schools don’t succeed unless their students do.
We’ll continue to share updates on incentive-aligned education
Incentive alignment between schools and students is the objective.
As long as the underlying principles of student protection and incentive alignment hold true, that’s what matters.
…create an education model where the incentives of the school and student are aligned
…keep financial risk low for students and maintain incentive alignment.

Lambda’s big innovation is the Income Share Agreement, a mechanism that allows students to pay the bootcamp as a percentage of their salary, rather than paying tuition upfront. This ensures that the bootcamp is free to attend until you get a job, and ensures that Lambda is extremely incentive aligned.

But is it actually?

Here’s the details of the Lambda deal:

Students pay 17% of their salary for 2 years,
Payments are capped at $30,000, no matter how much you’re making
Students only pay if they’re making over $50,000

With this information, we can graph Lambda School’s 2-year returns against raw student income:

Those flat lines represent the cap and floor. The section in the middle is where Lambda Returns grow as a function of Student Income.

But remember that these returns come out of student income. So account for Lambda payments and taxation, here’s the same chart, but now with another line for Actual Student Income.

(Source)

That huge drop at $50,000 is the point where tuition payments kick in, and Actual Student Income drops off.

This is a classic example of a perverse incentive: students would actually earn more with a lower salary [1]. As payments and taxes scale with earnings, students aren’t back to the actual income they had at a raw salary of $49,000 until they hit a raw salary of $67,000, nearly $20,000 later.

Accordingly, we can divide the graph into 4 segments, and for each, ask if incentives are actually aligned:

1) Not Aligned: Actual Student Income increases, but Lambda Returns do not.
2) Misaligned: Actual Student Income drops, but Lambda Returns grow sharply.
3) Aligned: Actual Student Income and Lambda Returns grow together.
4) Not Aligned: Actual Student Income increases rapidly, but Lambda Returns are flat.

To summarize, the actual incentive-alignment portion of this graph only happens in section 3 (when raw income is between $67,000 and $88,000). Despite their repeated claims, Lambda School is not actually incentive-aligned.

Okay, fine, but does this actually matter? Maybe all salaries fall in that incentive-aligned range, and so in practice, Lambda is effectively incentive-aligned.

We can test this hypothesis against Lambda’s table of reported student outcomes:

We want to know how many students make between $67,000 and $88,000. Using a naive assumption of uniform distribution within buckets, we get 47 students, or 26% of the total population. [2]

To make a closer approximation, we can estimate an underlying normal distribution.

The range we’re curious about ($67k - $88k) doesn’t align with the bucketing, but we can make an educated guess by estimating the underlying normal distribution:

That’s with mean $72,000, SD $26,000. This is still naive, but seems to be a decent approximation, and probably better than the uniform assumption. Using this model, we estimate that 31% of graduates are earning $67,000 - $88,000.

To sum up, Lambda School appears to be incentive-aligned with around one third of their students.

While Lambda School is not properly incentivized to improve income for the majority of its students, you might still argue that it is at least incentivized to get them a job.

This is fair, but also true of every other educational institution. Flatiron School releases data on job placement outcomes, as does General Assembly, and does every university. It doesn’t matter if you literally get paid as a portion of student income, every institution has a reputation to uphold, and a case to make for its value.

It is true that Lambda School only charges tuition if you get a job earning more than $50,000, and that’s great. For many students however, I expect this calculation to be dominated by the question of whether or not they’ll actually have a job at the end, a matter on which Lambda School has been notoriously deceptive.

[1] This concept of being punished for earning money is at the heart of the libertarian critique of taxes. It’s absolutely bizarre that Lambda has appropriated libertarian rhetoric without any of the accomplaying economics.

[2] (75 - 67) / 25 * 71 + (88 - 75) / 25 * 46