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The advantage of the simultaneous rates test over the standard lagged flows one is
great. It avoids both lags, meaning the intended one to allow more capital to show
its effect in more output, and the unintended one in the inherent unresponsiveness
of accounts to market effects on capital already booked, while also gaining from the
superiority of market measures of capital growth over book ones even when lags
end. The method itself is no surprise because the math is high school algebra. The
shock is in what it reveals. Solow and Denison were righter than they knew. There is
no such thing as capital accumulation at the collective scale.
Risk theory is probably both marginal novelty and marginal surprise. The part that
might be new, although obvious in retrospect, is that assets take on the risk
characteristics of their owners. We knew all along that people buy assets to fit their
own risk profiles. There may be novelty in my idea that it works the same in the
opposite direction. Assets once acquired are modified to fit those profiles better. A
family home bought by a drug dealer might become a crack house bringing higher
expected return at higher risk of confiscation by authorities.
The next step was to connect risk profiles with age and gender. It seems well
established that risk tolerance peaks in the teens and twenties, particularly in males.
It drops steadily afterward for both sexes. R. A. Fisher in 1930, and Bob Trivers in
1972, suggested why. Males, in humans, produce thousands of cheap sperm.
Females produce eggs, which are few and expensive because they are packed with
nutrients. Young males might end up leaving dozens of offspring or none. Nature
arranges competition to determine which. Females are reasonably sure to leave a
few. They have less to compete about. As both sexes get past their 20s, their
remaining reproductive chances grow fewer and competitive ranking clearer. There
is less to compete about. Risk tolerance grades steadily down with age, and capital
owned reflects the change with lower risk and return. This gives the basic theme.
The next key information was that human capital is owned disproportionately by
the young. We own little else until independence at age 20 or so. Physical capital
Chapter 9: So What ‘s New? 3/17/16 2
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