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Simulating the Risk of Investment in Human Capital

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  • Joop Hartog
  • Hans Van Ophem
  • Simona Maria Bajdechi

Abstract

The risk of investment in schooling has largely been ignored. We mimic the investment decision facing a student and simulate risky earnings profiles in alternative options, with parameters taken from the very limited evidence. The distribution of rates of return appears positively skewed. Our best estimate of ex ante risk in university education is a coefficient of variation of about 0.3, comparable with that in a randomly selected financial portfolio with some 30 stocks. With risk attitudes varying by parental background, this may be relevant for differences in schooling participation rates. Allowing for stochastic components in earnings also markedly affects expected returns.

Suggested Citation

  • Joop Hartog & Hans Van Ophem & Simona Maria Bajdechi, 2007. "Simulating the Risk of Investment in Human Capital," Education Economics, Taylor & Francis Journals, vol. 15(3), pages 259-275.
    • Handle: RePEc:taf:edecon:v:15:y:2007:i:3:p:259-275
    DOI: 10.1080/09645290701273434
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    References listed on IDEAS

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    10. Stacey Chen, 2001. "Is Investing in College Education Risky?," Discussion Papers 01-09, University at Albany, SUNY, Department of Economics.
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    Cited by:

    1. Sergey Roshchin & Victor Rudakov, 2015. "Do Starting Salaries for Graduates Measure the Quality of Education? A Review of Studies by Russian and Foreign Authors," Voprosy obrazovaniya / Educational Studies Moscow, National Research University Higher School of Economics, issue 1, pages 137-181.
    2. Cattaneo, Maria A. & Wolter, Stefan C., 2022. "“Against all odds” Does awareness of the risk of failure matter for educational choices?," Economics of Education Review, Elsevier, vol. 87(C).
    3. Bilkic, N. & Gries, T. & Pilichowski, M., 2012. "Stay in school or start working? — The human capital investment decision under uncertainty and irreversibility," Labour Economics, Elsevier, vol. 19(5), pages 706-717.
    4. Simon Fan & Yu Pang & Pierre Pestieau, 2022. "Investment in children, social security, and intragenerational risk sharing," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 29(2), pages 286-315, April.
    5. Beladi, Hamid & Sinha, Chaitali & Kar, Saibal, 2016. "To educate or not to educate: Impact of public policies in developing countries," Economic Modelling, Elsevier, vol. 56(C), pages 94-101.
    6. Bianca Frogner, 2010. "The missing technology," Applied Health Economics and Health Policy, Springer, vol. 8(6), pages 361-371, November.
    7. Díaz Serrano, Lluís & Hartog, Joop & Nilsson, William & Ophem, Hans van & Yang, Po, 2016. "Student earnings expectations: Heterogeneity or noise?," Working Papers 2072/267265, Universitat Rovira i Virgili, Department of Economics.
    8. Russ, Meir, 2016. "The probable foundations of sustainabilism: Information, energy and entropy based definition of capital, Homo Sustainabiliticus and the need for a “new gold”," Ecological Economics, Elsevier, vol. 130(C), pages 328-338.
    9. Saibal Kar, 2013. "Interest Rate, Human Capital and Tax," Review of Market Integration, India Development Foundation, vol. 5(1), pages 71-82, April.
    10. Mizuki Tsuboi, 2018. "Stochastic accumulation of human capital and welfare in the Uzawa–Lucas model: an analytical characterization," Journal of Economics, Springer, vol. 125(3), pages 239-261, November.
    11. Paolo Buonanno & Dario Pozzoli, 2007. "Risk Aversion and College Subject," Working Papers (-2012) 0707, University of Bergamo, Department of Economics.

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