In most schools, you can take some courses Pass/Fail rather than for a grade. If you pass, the course then it counts towards your degree, but not for your GPA. If you fail, it counts towards your GPA. I suspect that most Pass/Fail grades end up being Pass.

Grades are a kind of balance sheet. Pass/Fail is the analog of abolishing marking to market, except in the case of total bankruptcy.

Perhaps this would work with securities too. The owner of a security could, in advance, declare that he or she is acquiring the security according to On/Off accounting rules. On means worth more than you paid for it, and hence it appears on balance sheet but with no value other than the statement that it is in the black, worth more than what you paid. Analysts and auditors are not allowed to ask exactly what it’s worth. Off means worth less and hence will be off balance sheet.

The theory of grading isn’t stagnant either, but keeps progressing, usually in the same direction. Some schools now offer Pass/D/Fail, or PDF. If the instructor gives you above a D, your grade is simply registered as a Pass and doesn’t contribute to your GPA. If you get a D or an F, it does. But PDF comes with an embedded option,much like a convertible bond: as a student, you can decide, after the exam and if you pass, to retroactively “uncover” your Pass grade. “Uncover” is a euphemism for “convert”. This means that if you think you did well, you can convert the pass into a letter grade that will contribute to your GPA. If you think you did not so well, you can stick with Pass.

The avowed aim of Convertible grading is to make students take more risk, to not fear experimenting with difficult courses, by diminishing the possibility of a GPA-reducing grade. But actually, it’s making them take less risk, just as a convertible bond is less risky than pure equity.

Convertible grades, like convertible bonds, are a great invention. The corporate world may have something to learn from this. One could extend On/Off Accounting into Convertible Accounting. A security acquired under Convertible On/Off Accounting Rules can stay off balance sheet until it’s in the black, at which point you can move it on balance sheet, and you can convert the On into a true mark to market if you think that will benefit you. This too will make investing less risky.

Gresham’s Second Law: Bad grades drives out good grades.