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Abstract:
Consumer choice occurs over multiple products and services, each comprising multiple risks. In this paper, we present a new market research technique to measure consumers' preferences over large spaces of risks. We first describe the method, present its psychological and analytical motivation, and then report the results of empirical tests of reliability and validity, both within testing sessions and across the span of one year. The method is used to estimate the coefficient of relative risk aversion and the loss aversion parameter for a sample of adults saving for retirement. The new technique passes tests of reliability and validation and captures individual differences based on age and income. It also identifies two sub-populations, one best fit by a more classical model of risk preference, and the other by a behavioral model which incorporates loss aversion.

marketing research tools, consumer behavior, decision-making, parameter estimation, measurement, segmentation, risk, utility, uncertainty

Abstract:
Today's retirees face the daunting task of determining appropriate investment and spending strategies for their accumulated savings. Financial economists have addressed their problem using an expected utility framework. In contrast, many financial advisors rely instead on rules of thumb. We show that some of the popular rules are inconsistent with expected utility maximization, since they subject retirees to avoidable, non-market risk. We also highlight the importance of earmarking - the existence of a one-to-one correspondence between investments and future spending - and show that a natural way to implement earmarking is to create a lockbox strategy.

Retirement, Drawdown, Planning, Lockbox

Abstract:
The 4% rule is the advice many retirees follow for managing spending and investing. We examine this rule’s inefficiencies—the price paid for funding its unspent surpluses and the overpayments made to purchase its spending policy. We show that a typical rule allocates 10–20% of a retiree’s initial wealth to surpluses and an additional 2–4% to overpayments. Further, we argue that even if retirees were to recoup these costs, the 4% rule’s spending plan remains wasteful, since many retirees actually prefer a different, cheaper spending plan.

Retirement economics, expected utility, fixed withdrawals

Abstract:
No abstract is available for this paper.

Abstract:
The first part of this paper provides a historical perspective on bank risks. Five-year moving average measures of total risk, market risk, and nonmarket risk are computed for an index of New York banks from 1929-1975 and for an index of outside New York banks from 1950-1976.We use a carefully constructed series of bank balance sheet data to compute correlations among various components of New York banks` port-folios and observe trends over time. The time series relationship between book values and market values is investigated, and classical measures of capital adequacy are calculated using surrogates for market values rather than book values. Finally, data are presented on the movement of interest rates and the term structure over time. Serial correlations and cross-correlations are computed. The second part of the paper uses the technique proposed in Sharpe ("Bank Capital Adequacy, Deposit Insurance and Security Values," June 1978) to gain information about capital adequacy. He has shown that for a bank with deposit liabilities that do not extend beyond the review period a "value preserving spread" in asset risk is likely to increase the value of capital. Moreover, the less adequate the capital, the larger this effect should be. We outline the method used to develop an econometric model to test for this effect. The model is then applied to time series data from 1938 to 1975.

Abstract:
This paper provides a formal setting for the analysis of the capital adequacy of an institution with deposits insured by a third party. An insured depositor has a claim against the institution and a contingent claim against the insurer. This paper analyzes the effect of the riskiness of the asset mix and the relative amount of deposits and capital on the potential liability of the insurer. It shows that an increase in asset risk, holding value constant, increases the value of equity and raises the potential liability of the insurer.

Abstract:
Investing for retirement is one of the most consequential yet daunting decisions consumers face. We present a way to both aid and understand consumers as they construct preferences for retirement income. The method enables consumers to build desired probability distributions of wealth constrained by market forces and the amount invested. We collect desired wealth distributions from a sample of working adults, provide evidence of the technique's reliability and predictive validity, characterize individual- and cluster-level differences, and estimate parameters of risk aversion and loss aversion. We discuss how such an interactive method might help people construct more informed preferences.

Abstract:
The 4% rule is the advice many retirees follow for managing spending and investing.We examine this rule’s inefficiencies - the price paid for funding its unspent surpluses and the overpayments made to purchase its spending policy. We show that a typical rule allocates 10-20% of a retiree’s initial wealth to surpluses and an additional 2-4% to overpayments. Further, we argue that even if retirees were to recoup these costs, the 4% rule’s spending plan remains wasteful, since many retirees actually prefer a different, cheaper spending plan.

Retirement economics, expected utility, fixed withdrawals

Abstract:
The 4% rule is the advice many retirees follow for managing spending and investing. We examine this rule’s inefficiencies-the price paid for funding its unspent surpluses and the overpayments made to purchase its spending policy. We show that a typical rule allocates 10-20% of a retiree’s initial wealth to surpluses and an additional 2-4% to overpayments. Further, we argue that even if retirees were to recoup these costs, the 4% rule’s spending plan remains wasteful, since many retirees actually prefer a different, cheaper spending plan.

Retirement economics, expected utility

Abstract:
Most asset allocation analyses use the mean-variance approach for analyzing the trade-off between risk and expected return. Analysts use quadratic programming to find optimal asset mixes and the characteristics of the capital asset pricing model to determine reasonable optimization inputs. This article presents an alternative approach in which the goal of asset allocation is to maximize expected utility, where the utility function may be more complex than that associated with mean-variance analysis. Inputs for the analysis are based on the assumption of asset prices that would prevail if there were a single representative investor who desired to maximize expected utility.

Portfolio Management, Asset Allocation, Investment Theory, CAPM, APT, and Other Pricing Theories, Efficient Market Theory, Portfolio Theory

Abstract:
This article describes a set of mean-variance procedures for setting targets for the risk characteristics of components of a pension fund portfolio and for monitoring the portfolio over time to detect significant deviations from those targets. Because of the significant correlations of the returns provided by the managers of a typical defined-benefit pension fund, the risk of the portfolio cannot be characterized as simply the sum of the risks of the individual components. Expected returns, however, can be so characterized. I show that the relationship between marginal risks and implied expected excess returns provides the economic rationale for the risk budgeting and monitoring being implemented by a number of pension funds. I then show how a fund's liabilities can be taken into account to make the analysis consistent with goals assumed in asset/liability studies. I also discuss the use of factor models and aggregation and disaggregation procedures. The article concludes with a short discussion of practical issues that should be addressed when implementing a pension fund risk-budgeting and -monitoring system.

Risk Measurement and Management: portfolio risk

Abstract:
The Financial Economists Roundtable (FER) is a group of senior financial economists who have made significant contributions to the finance literature and seek to apply their knowledge to current policy debates. The Roundtable focuses on microeconomic issues in investments, corporate finance, and financial institutions and markets, both in the U.S. and internationally. Its major objective is to create a forum for intellectual interaction that promotes in-depth analyses of current policy issues in order to raise the level of public and private policy debate and improve the quality of policy decisions.FER was founded in 1993 and meets annually. Members attending a FER meeting discuss specific policy issues on which statements may be adopted. When a statement is issued, it reflects a consensus among at least two-thirds of the attending members and is signed by all members supporting it. The statements are intended to increase the awareness and understanding of public policy makers, the financial economics profession, the communications media, and the general public. FER statements are distributed to the financial and economic academic and practitioner communities, relevant policy makers, and the media.