day, it was substantially to be the whole of pay. Now it becomes present value of a
day’s pay five years off.
Another Look at Risk Theory
I made the point that the boss and her secretary reveal their time preferences in the security portfolios they assemble, and discount their pay at the same rate of return to reveal their human capital. Is that too simple? Does it overlook risk, or other
factors?
] argued that human capital is the risker and higher-return factor because its exceptional versatility makes it as risky as we like, and because it is owned disproportionately by the risk-tolerant young. Does that make the bosses’ or secretary's human capital riskier and higher in return than her portfolio assets? It does not. She molds all capital to her single risk-preference level at her current age. This is not to claim that age is the only determinant. Gender seems to count too, with males usually more risk-tolerant. Bob Trivers tells us why. And there is a wealth effect. We tend to tolerate more risk when wealth gives us more cushion against setbacks. But each of us, in present circumstances, has just so much tolerance. Tastes are properties of owners, not of assets. We assemble and modify assets of both factors to suit them. Human capital is not inherently riskier. It is riskier at the collective scale only because it is owned disproportionately by the risk-prone young. Each cohort, from youngest to oldest, molds it to suit that cohort’s characteristic risk profile. The boss and her secretary each molds all her assets of both factors to her
single risk tolerance at the time.
Tweaking the Life Cycle Model
I consider Ben-Porath’s life cycle model of 1967 the most important paper in 20 century economics. | agree with all of it more or less. Now it needs clarification and
completion.
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