Sunday, June 28, 2020

The knowledge paradox

Gaining knowledge is costly. It takes time, effort, and money. Rational decision-makers will partake in this activity only if the risk-adjusted excess returns from it are positive. Since the risk associated with investing in gaining knowledge has both a systematic and idiosyncratic component to it, if the individual is able to diversify the unsystematic risk by accumulating varied and less correlated knowledge items, the relevant risk for computing returns to knowledge is only the systematic component. Thus, it may be dominant for a young person to garner knowledge in uncorrelated domains. In this context, education systems that force an individual to specialize may be responsible for reducing overall returns to knowledge for the individual and for society more broadly. Further, the value of specialized knowledge declines in a regime of high volatility as the aggregate option value of the portfolio will be higher if it is constructed with diverse and uncorrelated knowledge components.
The value of knowledge, however, declines with age. Both the returns to knowledge as well as any diversification advantages that exist from varied knowledge decline sharply after a certain age. Thus,...