Private Equity Versus School Teachers

Here's my hypothesis: All parents believe their kids are above average students, therefore grade school teachers pay falls short of private equity managers.

Suppose you manage your investments with some help.  You'll only make a small number of these investments in your lifetime, and you can't really undo your decisions.  You use help, but you know for certain you are a better than average investor.  You hire people to help you on a series of short term contracts.  You definitely know you need the assistance, but the investments you make have a very long time horizon, the return on investment won't be known for many years, and really, you don't give them much credit because you know you're a good investor.
 
Now, suppose you don't think you're a better than average investor.  In fact, you find the whole process intimidating, you don't have the time or the skills to make good investments.  This lack of confidence drives you to hire long term advisors, give them broad discretion, and you hang on every word they utter.  Everything else is the same as before.

How do you pay your advisers in these different situations?  In the first case, you probably pay them very little.  In the second case, you pay them very well.  Only your confidence changed.  The first scenario describes investing in childhood education.  The second describes many illiquid investments, particularly private equity.

There's an endless supply of data on people's overconfidence in almost everything.  Who thinks they're a below average driver?  Probably about the same fraction of parents who say their kids have below average intelligence.  (I would love to see the shock in a conference between a parent and a grade school principal when the parent says "my child's teacher is so intelligent, I don't think my idiot kid can learn from him.")

Similarly, the evidence that people chase performance in the investment world may be as common as rooms filled with above average drivers.  Yet people still pay huge sums for little value added.

I suspect many parents and many investors would be better off if they realized that (1) their children may actually be below average students and, (2) other peoples' children may not grow up to be above average investors.