## Expected value of scholarships?

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westinghouse60

Posts: 392
Joined: Mon Aug 02, 2010 2:27 am

### Expected value of scholarships?

I've always heard on TLS that you really can't guess where you'll end up after your 1L, no matter what ranked school you go to (e.g. don't assume because you have a 170 LSAT you'll end up at the top of the class at your T2). Given this thinking, should I/people in general think about scholarships in expected value terms, since its relatively random where you end up?

For example, if a \$20,000 scholarship has a stipulation to stay in the top 50% of your class, the true "value" of the scholarship is really .5(\$20,000)=\$10,000. Is this reasonable, or too conservative?

Just trying to think of a way to objectively evaluate different scholarship offers I've gotten.

09042014

Posts: 18204
Joined: Wed Oct 14, 2009 10:47 pm

### Re: Expected value of scholarships?

If you really truly gun (outpacing most of your class) you might have like a 60% chance of being top 50%.

ben4847

Posts: 788
Joined: Mon Nov 07, 2011 11:38 pm

### Re: Expected value of scholarships?

westinghouse60 wrote:I've always heard on TLS that you really can't guess where you'll end up after your 1L, no matter what ranked school you go to (e.g. don't assume because you have a 170 LSAT you'll end up at the top of the class at your T2). Given this thinking, should I/people in general think about scholarships in expected value terms, since its relatively random where you end up?

For example, if a \$20,000 scholarship has a stipulation to stay in the top 50% of your class, the true "value" of the scholarship is really .5(\$20,000)=\$10,000. Is this reasonable, or too conservative?

Just trying to think of a way to objectively evaluate different scholarship offers I've gotten.

I don't imagine even the biggest "LSAT haters" would say it is completely random.

Also, you need to adjust for risk. So that .5(20k) is probably only worth like 7k

laxbrah420

Posts: 2720
Joined: Fri Aug 12, 2011 1:53 am

### Re: Expected value of scholarships?

I thought this was going to be an interesting discussion where you valued scholarships in terms of how they affect your debt levels, expanded it by interest rate, and adjusted for the discount rate/future value of money.

laxbrah420

Posts: 2720
Joined: Fri Aug 12, 2011 1:53 am

### Re: Expected value of scholarships?

ben4847 wrote:Also, you need to adjust for risk. So that .5(20k) is probably only worth like 7k

Could you elaborate? What is the risk and why does it decrease the value of a scholarship?

ben4847

Posts: 788
Joined: Mon Nov 07, 2011 11:38 pm

### Re: Expected value of scholarships?

laxbrah420 wrote:
ben4847 wrote:Also, you need to adjust for risk. So that .5(20k) is probably only worth like 7k

Could you elaborate? What is the risk and why does it decrease the value of a scholarship?

Well, if you could choose between having a 50% chance of 20k or just having 10k, you would choose the 10k. This is because you will be very bothered by having zero. This is called risk aversion. (And this is why you don't usually go to casinos and drop 10k on 50-50 bet.)

You need to figure out the amount of money which would be equal for you to .5(20k).

laxbrah420

Posts: 2720
Joined: Fri Aug 12, 2011 1:53 am

### Re: Expected value of scholarships?

It's not 20k or Zero

dingbat

Posts: 4975
Joined: Wed Jan 11, 2012 9:12 pm

### Re: Expected value of scholarships?

laxbrah420 wrote:I thought this was going to be an interesting discussion where you valued scholarships in terms of how they affect your debt levels, expanded it by interest rate, and adjusted for the discount rate/future value of money.

For that we need more data:

1) value of scholarship
2) stipulation to keep it
3) COA for that school
4) percentage chance of getting biglaw job at that school
5) typical salary for students who don't get biglaw
6) same data for better school at sticker (for comparison)
7) interest rates on student loans (multiple rate info...)
Discount rate (future value of money)

With sufficient data, I could build a model; practically speaking, let's work on the following:
Cash flow out (per year) A = 3 - (1*2) (expected value of scholly)
Future cash flow (per year) B = 4 * \$160k + (1-4) * 5
Beyond that, you've got to figure out how many years out you want this to run, and figure out reasonable wage increases.

Then run this through excel or a financial calculator (I'd go with excel - if you're good at it, this'll take about 15 minutes) and you can compare whether to take the lesser school with scholly or the better school at sticker (or smaller scholly)

dingbat

Posts: 4975
Joined: Wed Jan 11, 2012 9:12 pm

### Re: Expected value of scholarships?

ben4847 wrote:
westinghouse60 wrote:I've always heard on TLS that you really can't guess where you'll end up after your 1L, no matter what ranked school you go to (e.g. don't assume because you have a 170 LSAT you'll end up at the top of the class at your T2). Given this thinking, should I/people in general think about scholarships in expected value terms, since its relatively random where you end up?

For example, if a \$20,000 scholarship has a stipulation to stay in the top 50% of your class, the true "value" of the scholarship is really .5(\$20,000)=\$10,000. Is this reasonable, or too conservative?

Just trying to think of a way to objectively evaluate different scholarship offers I've gotten.

I don't imagine even the biggest "LSAT haters" would say it is completely random.

Also, you need to adjust for risk. So that .5(20k) is probably only worth like 7k

Expected value is a calculation of value based on risk and should therefore not be adjusted for risk.
the expected value of 0.5*\$20k is \$10k, because there's a 50% chance of getting it.
Risk aversion is a subjective matter. Some people would rather take 0.5k*\$20 while others would prefer \$10k guaranteed.
Statistically, however, they are both worth the exact same:
A = 2 people get 0.5*20k
B = 2 people get 10k guaranteed
A = B (in both cases, the school gives out \$20k total in scholly funds)