Can Human Capital and Asset Management Improve the Financial Performance of Older Age Groups? Evidence from Europe

Extending Ehrlich et al.’s (2008, 2011) labor-theoretic, rational-expectations model of asset management (AM), we investigate the interplay between AM and portfolio choices of older-age households in a sample of 11 European countries plus Israel over 5 waves of the SHARE longitudinal data in the period 2004-2015. Our analysis shows that education, health, and other components of human capital, generally determine the reduced-form demand for, or portfolio shares of, risky assets, the derived-demand for asset management time, and the household’s portfolio returns. Moreover, we find that education and underlying health conditions affect these portfolio outcomes largely through proxies of time household heads devote to asset management. Our key findings hold up against a battery of robustness and internal validation tests based on reduced-form and structural IV regressions, alternative regression specifications, and alternative groups of investors. We also find that the effects of education on the demand for AM time, risky financial assets, and portfolio returns, become larger as the opportunity costs of AM fall with age, which supports the mechanism of the asset management hypothesis.