Interpreting Performance: Evidence on Signal Weighting in Human Capital Investment

Parents invest in children’s human capital based on signals of academic performance, but we do not know how they weigh each when having perfect information or when they contain conflicting signals. Using 23,321 investment decisions from a survey experiment with 2,079 U.S. parents, we provide the first evidence on how parents trade off grades against standardized test scores. Both signals affect investment: parents adopt compensatory strategies, investing more when either signal indicates poor performance. Parents also put a higher weight on grades than tests, on average. However, we document asymmetric crowd-out: when grades are high but test scores are low, parents do not invest—high grades crowd out the response that low test scores would otherwise trigger. When grades are low but test scores are high, parents invest. This asymmetry implies that grade inflation imposes costs beyond direct signal distortion by preventing remedial investment in struggling students. Hispanic parents exhibit particularly pronounced grade-weighting. Our findings suggest that information interventions providing test scores will have attenuated effects when parents already possess inflated grade information.