Human Capital and its Implications on Financial Risk-taking

Abstract

When most people think of portfolio composition and optimal asset allocation, words like stocks, bonds, real estate and diversification come to mind. However, people tend to ignore one specific and highly important asset class: namely human capital. Human capital is defined as the present value of all future income of an individual. The total wealth of an individual is composed of two parts: human capital and financial capital. Theory tells us that intertemporal decisions and wealth management should take a total wealth perspective. Accordingly, one will consider the correlation between all assets and thus, gain more from diversification. Hence, human capital should be valued as an asset class in line with other financial assets. In this thesis, we attempt to understand how households consider the properties of their human capital when making their portfolio choices.