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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, it is puzzling why older people will engage in the accumulation of knowledge in diverse domains. It has been observed that individuals take on foreign knowledge domains, such as new languages, music, literature, and even science after retirement. Since the computable and observable returns from these apparently irrational activities are negative, it has to be that there are benefits that are intangible. Such benefits may include an incremental extension of life by keeping the brain active and packets of happiness emanating from gameplay if knowledge-seeking is constructed as a game. These are difficult to measure and may depend on the individual.

As the expiration date of an individual is predictable within reasonable error bands, it may be possible to tease out the motivation for knowledge activities through longitudinal studies. Controlling for the individual’s mental deterioration with age, it is possible that the individual will continue to enhance the diversity of her knowledge portfolio. If the extension of life is the dominant objective, this activity should decline over time with a sudden drop closer to expiry. If gameplay drives the motivation, it should hold steady and perhaps even increase as the individual nears the irreversible outcome.

A diverse portfolio of knowledge appears dominant whatever age one is, except very close to expiry.

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