Signaling with the CFA
By Bryan Caplan
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.