Simulating the Risk of Investment in Human Capital

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.