Human Capital versus Financial Capital

Helpful ideas for my mind’s grasp, getting a handle!!

Quant Investor's Blog

If someone were to ask you for your net worth, you would most likely just add up your financial assets and subtract your financial liabilities. But this would give an incomplete picture, since human capital is an important component of net worth.

What is human capital? It is defined as the present value of an investor’s future labor income. The discount rate you would use depends on the nature of the employment. For a safe job in government or a tenured college professor you would use a lower discount rate. For a riskier job- say a commission-based job, or something where income is highly variable, you would use a higher discount rate.

There are some additional complications. Suppose you take an early retirement, but still have the skills and ability to work again if you wanted to. The human capital calculation should not be zero, but should factor in the…

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