"What a piece of work is a man! How noble in Reason! How infinite in faculties!" † ... But how much is he worth? Huggett and Kaplan provide an answer.
While markets exist that determine the value of houses, cars and IBM stock, many assets are not marketed. Thus, their value is not precisely known. For example, toll bridges are valuable but their value is not determined on a centralized exchange. GCER Fellow Mark Huggett and co-author Greg Kaplan from the University of Pennsylvania have new research that determines the monetary value of by far the most valuable asset that most people own: themselves.
Their new paper "The Money Value of a Man" proposes a method for evaluating the monetary value of an individual. Far from being an esoteric exercise, knowing one's monetary value is, in fact, quite useful. The most obvious application deals with how one should divide one's financial wealth between stock and bond holding. If one's monetary value can be determined then the return on human wealth is simply the future value plus future earnings divided by the current value. If this human wealth r [click to get Huggett paper] eturn looks like the return to low-risk bonds, then one should invest heavily in stock since the overall portfolio is already heavily weighted towards bonds.
If, however, one's human wealth return looks like the return to stock, then one would be wise not to invest at all in stock. A key part of portfolio allocation advice therefore boils down to answering the question: what is the monetary value of a man?
To answer this question sensibly, Huggett and Kaplan face two main tasks. First, they determine how male earnings move with the return to stock and bonds. Second, given such a statistical model summarizing how earnings and asset returns move, they measure the value of these future earnings in terms of current dollars.
Huggett and Kaplan find that the average return on human wealth for high school or college educated U.S. males is several times the mean return to stock early in the working lifetime and that this return declines as males approach retirement. This is driven by the large amount of idiosyncratic earnings risk faced by young males together with the limited ability to share this risk. The authors also find that the stock component of human wealth is smaller on average than the bond component throughout the working lifetime.
† Shakespeare's Hamlet, Act II, scene II