Tiago Splitter wrote:RedBirds2011 wrote:ToTransferOrNot wrote:I don't think individuals should be acting as risk-neutral investors, because education debt essentially represents an extreme lack of diversification. It's very similar to someone whose entire net worth is tied into a single asset--his sole proprietorship--except that, of course, a student is worse off, because a sole proprietorship's downside is limited to zero net worth after bankruptcy, rather than -200k.
Less diversification means that it is *rational* to be more risk-averse. This is a pretty basic aspect of financial planning. Rayiner, correct me if I'm wrong, but your model seems to be for a risk-neutral investor. Isn't that imprudent?
When are law students going to stop treating law school like a stock portfolio? More diversification? How would that work with education? Like buying multiple degrees to hedge employment risks? Lol come on people.
In effect he's saying that you shouldn't treat it like a stock portfolio.
Exactly. The point I was making was that Rayiner's calculation seems to be presuming a risk-neutral thought process, and that's probably not appropriate for someone who is looking at taking out student debt. Instead, the calculation should be focused on an appropriate level of risk-averseness, meaning that the expected payoff, compared to a risk-neutral thought process, should be higher to make it a good "investment."
Put differently: If I'm risk-neutral, a lottery ticket with 50% chance of paying $100 and 50% chance of paying $0 is worth $50 to me. If I'm risk-averse, I may only be willing to pay $30 or $40 for that ticket, even though the expected value of the ticket is $50. I'm saying that people taking out student loans should not be willing to pay $50 for that 50/50:$0/$100 "ticket" (the ticket being the loans). Considering the absolutely life-crushing results of the debt if you don't land on the pay side of the ticket, and the complete lack of diversification, I would say that you should be down in the "20s" before you think of buying that ticket.