Gary Becker, recipient of the 1992 Nobel Memorial Prize in Economic Sciences, left behind a human-behavior approach to the study of economics, including a principle used to model target-date funds and defined contribution plan glidepaths.
Mr. Becker, 83, died May 3 in Chicago following a long illness. He was an economics and sociology pro-fessor at the University of Chicago.
While other academics studied broad economic trends, Mr. Becker's work focused more on human behavior on the premise that rational economic agents comprise society. One of his chief areas of study — human capital — serves as the basis of Morningstar Investment Management's modeling for life- cycle investments and target-date funds, said Hal Ratner, head of research at Morningstar, Chicago.
“The concept of human capital didn't originate with Becker, but it's most associated with him since he modeled human capital,” Mr. Ratner said. That modeling as an asset on a balance sheet, in turn, helps to model an investment strategy, he added.
Mr. Ratner said under the model, younger investors in DC plans have more human capital to spend through their life, and thus can make riskier, or more equity, investments, while older participants with less human capital to spend will need to be more conservative.
“If you buy ... the premise that human capital is important — and we think it's crucial — we think the concept of human capital is necessary to complete an investment portfolio,” Mr. Ratner said. “A lot of what (Mr. Becker) did has yet to see fruition,” he added. One of his legacies is that an investment adviser should get as much information as possible from an investor to determine his or her true human capital value, making any investment decision more sound, Mr. Ratner said.
Mr. Becker was a free-market devotee like his teacher and later colleague at the University of Chicago, Milton Friedman.
“Both of us were brainwashed by Milton Friedman,” said fellow U of C graduate Harry Markowitz, who received the Nobel prize in economics in 1990. Mr. Markowitz said the career path he took differed from Mr. Becker; Mr. Markowitz developed modern portfolio theory while Mr. Becker focused on individual and collective behavior.
“His specialty was "homo economicus,'” considering a variety of decisions considered deemed as rational or irrational behavior, Mr. Markowitz said.