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1)Axline-level people: MIT and Caltech take nearly all
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Yeah, but that begs the question - why does MIT take
so many of them. After all, MIT doesn't give out merit money. Hence, a lot of people are taking MIT over Caltech even when Caltech is offering money. That just seems to indicate that Caltech is really not as desirable to these particular people as MIT is that even money can't compensate.
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1)Axline-level people: MIT and Caltech take nearly all
(2)People capable of handling Caltech core, but not exceptional: MIT rejects many that Caltech accepts
(3)People not really capable of handling Caltech core: MIT accepts some, Caltech rejects nearly all (it makes some mistakes)
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Actually, I would argue that there's a category (4), comprised of people who have the ability to handle Caltech, but who don't even apply to Caltech at all because they're afraid of the legendary rigor, and who figure that they wouldn't go even if they got in, so why even apply? Instead, they strongly prefer 'safer' schools like HYPS. You can say that these are risk-averse people - people who don't want to take the risk of hurting their future marketability for future careers (i.e. for GPA-intensive criteria like law school or medical school). They can probably complete Caltech, and might even do well there, but they just don't want to take the risk that they won't do well. Let's face it - a lot of people (probably most) are risk averse.
So the real question is, does Caltech want to pull people in from category (4)? Look, just because you're psychologically risk averse doesn't mean that you're not brilliant. Being a brilliant scientist or engineer doesn't necessarily mean that you have to be a career daredevil. I know many extraordinarily intelligent and hard-working people who are also highly risk averse when it comes to their own personal and professional lives. Nothing wrong with that, they just place high premium on safety. Heck, I know a girl at Harvard who's a genius in physics and probably could have done very well at Caltech. But she's also a very risk-averse person, which is why she didn't even apply to Caltech for undergrad (although, ironically, she has now decided to go to Caltech for her physics PhD - but that's because going to Caltech for physics grad school is no riskier than going to any of the other top physics grad programs).
But the point is, I don't see why Caltech has to wrap risk into rigor as a package deal. Just because you enjoy and are good at technical subjects doesn't also mean that you enjoy risk. This girl evidently did very well for herself in the 'safe' environment at Harvard - so well that Caltech admitted her for graduate school. That implicitly dictates that you don't need to be a risk-taker to be a top science candidate. If you did, then why exactly would Caltech have admitted her for grad school? Was Caltech being dumb in admitting her?