My friend Sarah Constantin just wrote a post about wage statistics. These are very important, and she deserves applause for bringing them up. However, they must also be used carefully when deciding what job you should pursue. Let’s explore why, taking doctors as an example.

“What Jobs Pay Best? Doctors. Definitely doctors. The top ten highest mean annual wage occupations are all medical specialties. Anesthesiologists top the list, with an average salary of $235,070…. Bottom line: if you want a high-EV profession, be a doctor.”

Statistically, this is totally true. But if you want to become a doctor, and make that high salary, there’s a catch. In fact, there are a lot of catches. (Wages for any job should be ‘adjusted’ up or down for these factors, but doctors make a good case study.)

The first catch is, of course, medical school. Since you must go there to be a doctor, and it’s very expensive, a doctor doesn’t ‘really’ make the salary listed – part of the money must be used for repaying med school tuition. The same is true for college tuition.

The second catch is usually called ‘opportunity cost’. Consider a cashier vs. a doctor. The cashier makes less, but can start making money at age 16. The doctor doesn’t start until 30, on average – he does a lot of work (in school) for which he isn’t compensated. If people start ‘working’ at age 16 and retire at 65, the cashier is paid for all of those hours, while the doctor is only paid for two thirds. To make it a fair comparison, the doctors’ wages must be ‘spread out’, to cover the years he isn’t paid anything.

The third catch makes the first and second catches a much bigger deal than they seem. That’s discount rates. If I offer you $1 in 2040 in exchange for $1 now, you probably say no. Money in the present is worth more than money in the future, which is why loans charge interest.

For example, $250,000 in med school tuition isn’t that much, spread over a doctor’s career. However, the tuition is due now, while the career earnings may not arrive for thirty or forty years. How much this matters depends on what your ‘effective interest rate’ is. If it’s 5%, then each dollar of med school tuition must be ‘repaid’ by five dollars of additional salary thirty years out, in order to make it a ‘fair’ deal.

There’s also simple number of work hours. If doctors make a lot, but must work eighty hours a week, then a ‘fair’ comparison is to someone who is (eg.) working two forty-hour-a-week cashier jobs.

And finally, we get to more ‘subjective’ (but still very important) factors. Consider IQ. Getting into med school is hard; suppose, picking a number out of a hat, that you must have at least a 115 IQ to enter. If the average manager has a 100 IQ, then if you go into management, you’ll probably make more than the statistical median – the ‘real’ comparison, between doctor and the management job you’d actually have, is less favorable to doctor than it seems. Likewise, if the average physicist has 130 IQ, a doctor going into physics will most likely do worse than median, so the ‘real’ comparison is more favorable to doctor. The same is true for work ethic, charisma, initiative and all the other intangibles.

Summing it all up, one gets a net present value calculation: the EV of a job option is equal to the sum of discounted future cash flows, both positive (like salary) and negative (like college tuition). NPV is how good companies make business decisions, and I think we can do well if we also use it for career decisions.