September 21, 2005

More on "Should we ignore the racial gap in IQ?"

A reader below argued (perhaps facetiously) that:

And, from the standpoint of elites with their ravenous appetite for human capital, it may damage the morale of the subpopulations most at risk for underachievement... The best way to see this may be to analogize the cost of civil rights [i.e., quotas] to an option premium. The premium is reasonable in relation to the potential return (fabulous untapped human capital) and the risk (we will overlook the function of time just now). If you are right Steve, we just save the premium. That would be -- disappointing to the elites at this point. They redouble the bet. Fund returns are negative at the moment but we await the convergence event.

Of course, the option payment is paid by elites using Other People's Money and Opportunities. When Harvard's Larry Summers budgets $50 million to make up for his "gaffe" in noticing that there are more superbright male than female nerds by hiring less qualified women, it's not coming out of his pocket, nor is he promising to worsen his own career chances at Harvard -- he's already the President of Harvard!

Look, the reason Harvard has quotas for women, blacks, and Hispanics is not because Harvard doesn't believe in the SAT and other objective measures of IQ-related abilities. No, they desperately want to keep using the SAT and its kin -- the "Harvard" brand name is one of the most valuable in the entire world precisely because it stands for "High IQ" -- so they are buying off with quotas the high IQ individuals in the organized pressure groups that are less represented than average in the far right tail of the Bell Curve. Harvard doesn't fear that the dumb people of America are going to get themselves organized to stamp out the SAT, but it does fear that smart women, blacks, and Hispanics could do that if they truly felt solidarity with their lower IQ comrades. So it buys them off with quotas.

Furthermore, do the American elites actually have a " ravenous appetite for human capital?" Judging from elite opinion on the wonderfulness of illegal immigration, they have a ravenous appetite for uneducated servants who won't offer them any competition. The simplest way to get more human capital into America would be to reform the legal immigration system to make it more selective. For example, instead of admitting 50,000 random people a year through the Diversity Visa Lottery, we could select the 50,000 most likely to succeed out of the 5 to 10 million who apply each year. But how much agitation have you heard among America's elites for that reform?

Nor is there much evidence that the elites preaching a message of "Yale or jail" to African-American youths has increased black human capital. Judging by the incredible increase in blacks in prison versus the relative stagnation of black SAT scores over the last 20 years, African-Americans youths are deciding that Yale is out of the question so they might as well hurry up and go to jail. No, the American elite strategy appears to have been to waste African-American human capital by encouraging blacks to shun honest jobs they could perform, which are then filled by illegal immigrants, while average blacks take make-work white collar jobs and dumber black men go off to prison.

Responses from readers:

Your reader argues that jazz and blues suggest that we need affirmative action to guard against underestimating Black ability. But his remarks destroy his own argument. Has affirmative action been needed for blacks, recently, in sports and music? So is it needed in physics and math and admission to intellectual colleges in general? If a race is superior in a field, it shows. Is affirmative action needed for Europeans and Asians in the short sprints?


Your reader is wrong on his analysis of "the risk of cognitive mismeasurement":

1) Since the bulk of the evidence points to a large average difference in intelligence between whites and blacks a high IQ score for a black is more likely to be wrong than a high IQ score for a white. In fact, don't SAT scores overpredict actual black academic performance once admitted to college? Where's the evidence that test mismeasurement underestimates black abilities?

2) Racial preferences systems are not a "moderate tax on apparent merit". In fact, for whites displaced from slots the tax is very high. For other whites not displaced the tax is much lower. The tax falls more heavily on whites who are equal to or above most blacks in ability but not tremendously above them. The tax falls least on whites in the cognitive stratosphere (like, perhaps, your reader who makes the investment analogies).

3) He says "the risk of cognitive mismeasurement is non-trivial": But Griggs v. Duke Power and the racial preferences system reduce the ability to use cognitive ability as a means to choose people for jobs and openings into training programs. The risk of cognitive mismeasurement is much greater when you are not even allowed to use the most accurate test measures available. That holds true when choosing among whites as well.

4) How can he know that, as he implies, blacks are "most at risk for underachievement"? The risk has to be defined relative to a best guess of average relative ability for a group. Maybe the white working class today is at greater risk for underachievement relative to their absolute abilities. Maybe really smart white kids are most at risk of underachievement relative their level of abilities.

5) Racial preferences are not new. Efforts to improve black academic performance not new. Where is the evidence for "fabulous untapped human capital"? We keep investing and we keep not finding a huge return on investment in human capital. Shouldn't a shrewd investor at some point accept that the return isn't there?


Let's look at the contention that affirmative action is a "premium" paid by society, and if so, of what sort.

You write, "If you are right Steve, we just save the premium."

Now - if affirmative action were at all comparable to a financial "option", I would have few questions:

a) is the premium priced correctly relative to the probability of outcomes and their expected payout?

b) is it justified to force individuals to purchase an "option", if:

1) the option may not generate a profit relative to its expense, or

2) the option may not even have a reasonable expectation of covering its costs, or,

3) the option is explicitly for a social benefit "in future generations"?

Now, let's consider how large this premium is (which you imply is negligible, because America is so rich), which would also help compare the cost of the premium:

a) the expenses incurred in "diversity management" - the bureaucracies and endowments devoted to maintaining "diversity" at universities and corporations

B) the opportunity cost of students/employees who are less qualified taking the slots of students/employees who are more qualified. Keep in mind that this is not a simple substitution. A white student who may have sought out engineering is not replaced with a black engineer, simply with another black person. Thomas Sowell has written how many affirmative action admits study education, which is typically the least challenging major at a university.

c) The "premium" paid by society - in terms of higher crime rates, higher incarceration rates - caused by a refusal to acknowledge differences in educational requirements and job options for low-IQ minorities. A population that could be helped if we acknowledged and addressed different requirements would prevent the taxes incurred for incarceration, the loss of life from murder, etc. I don't see how we can argue that this is a small cost.

Your argument is essentially hopeful that the value of incremental professionals generated by these policies outweighs the costs identified above. An interesting assertion. Since we don't have this data available, let's think about this in theory:

If this were an option with real upside value to it, then corporations would willingly purchase what they saw as the opportunity to reap mis-priced talent. That's what people do with financial options.

If this mispricing were valuable, corporations who benefited from this mis-pricing would succeed to a greater extent than corporations who did not; the demand would change, and the mis pricing would disappear - problem solved.

But, there's a bit of a twist: this is mandatory. There are no market forces at work in compliance with affirmative action at major corporations. The insistence that affirmative action compliance be mandatory doesn't allow any sort of market to work at all.

Now, since we are looking for financial explanations to describe what is happening here, here's what I propose:

There is another type of premium paid in the financial world, which seems to be conveniently overlooked here - an insurance premium (or, if you like, a put option).

Insurance is a recurring fee paid in exchange for protection against large, unanticipated costs, and sadly, this is the only type of obvious empirical outcome related to affirmative action non-compliance that can be clearly and easily measured by a company.

That is: if a corporation is found in violation of "diversity principles", they will encounter litigation, which can be extremely expensive. However, a corporation can protect themselves with an affirmative action policy in place before any lawsuits occur. Of course, the practice of this requires a corporation to accept as true a theory that they did not develop nor have empirical data to support.

The only easily accessible empirical data about the value of affirmative action policies is the data on the cost of non compliance: you can be sued.

Hence, in effect, compliance with the policy is indeed a "premium" in the sense that is an expense occurred; but they are not buying options on upside; they are buying downside protection against potential litigation that would arise from non-compliance with a policy that was designed by activists, not businessmen.

Options are something that private citizens purchase when they believe the value of an asset is being undervalued by everyone else; because of this mis-pricing, they are able to profit by purchasing it.

When you "force" someone to purchase an "option" - you remove the magic that makes real options markets work, and in fact destroy the entire premise and utility of a market.

The mere comparison of "affirmative action" to an option here is classic Orwell: In our politically-correct, thought controlled world, what better name for something mandatory than "option"?

My published articles are archived at -- Steve Sailer

No comments: