“Asset Management, Human Capital, and the Market for Risky Assets” by Isaac EHRLICH
State University of New York at Buffalo
William A. HAMLEN Jr.
The dominant approach to financial markets views them to be informationally efficient. Less work has been done on how they get to reveal information. The answer we give stresses information acquisition at the micro level and the role of human capital in accommodating asset, or risk, management. Following the noisy rational-expectations-equilibrium approach, we derive equilibrium prices under costly information, but base the analysis on more complete micro foundations. We focus on the role of human capital endowments, indicators of “management” experience, and opportunity cost of time in explaining optimal asset management and risky-asset demand at the micro level, as well as the impact of these factors on the level and volatility of risky-asset prices. We implement our propositions using numerical simulations as well as regression analyses of individual data concerning portfolio choices and time allocation. We find that the rate of return to human capital in generating non-wage income is non-trivial.