Don’t Put All of Your Alums in One Basket: College Admissions Decisions as a Portfolio Choice Problem

Abstract

We consider philanthropy by college alums from an innovative and provocative perspective: what if prospective college students were considered members of asset classes with different risk-return combinations? Using forty years of merged admissions-philanthropy records on students at a highly selective liberal arts college, we estimate the simple financial model that this allegory implies. We find benefits to diversification, identify the slope of the market risk-return line, and point out the most (and least) attractive potential students in terms of their projected future donations.Keywords: admissions, alum, portfolio, CAPM IntroductionAlumni giving has become increasingly important for institutions of higher education, accounting for roughly fifteen percent of all private funding for higher education, or roughly $4 billion (Council for Aid to Education, 2012). Even as alumni giving has been rising (Kaplan, 2007), the participation rate of alumni giving back to their alma mater has been falling, while those who donate choose to contribute larger amounts (Engagement Strategies Group, 2010). Given this dynamic, there is enormous value in finding the right potential donors; it is unsurprising that academic models and consulting companies have tackled the question with fervor. This paper models alumni giving from a unique perspective, treating college admissions decisions as a portfolio choice problem, where prospective students are members of asset classes with rates of risk and return measured a priori by the propensity of each asset class to subsequently donate to their institution. While we do not suggest that admissions decisions are (or should be) made in this manner, we reflect on the implications of a simple Capital Asset Pricing Model (CAPM) framework using data provided by a selective liberal arts college.Academic research clearly describes patterns in alumni giving (e.g. Bruggink and Siddiqui,1995;Okunade et al., 1994;Wunnava and Lauze, 2001), identifying descriptive variables that predict philanthropy (Lara and Johnson, 2014;Meer, 2011;Meer and Rosen, 2007; Clotfelter, 2003; Monks, 2003;Cunningham and Cochi-Ficano, 2002; Forbes and Zampelli, 1997;Lindahl and Winship, 1992). Obvious demographic variables such as age, gender, ethnicity, and marital status have been shown to have predictive power, as have activities while in school (major, involvement in college sports, GPA, affiliation with a fraternity or sorority, certain kinds of financial aid) and post-graduation factors (time since graduation, number of relatives at one's alma mater, reunion years, willingness to share contact information with the college, response to college surveys, highest degree attained, participation in student government, induction into honorary societies, participation in alumni activities).In contrast, no study has proposed a predictive model based purely on factors known before the student enters higher education. Unlike the literature, our intention is not to explain or predict alumni giving, but to create asset ...