Regret, Portfolio Choice, and Guarantees in Defined Contribution Schemes

Posted: 21 Jul 2006

See all articles by Alexander Muermann

Alexander Muermann

WU (Vienna University of Economics and Business); Vienna Graduate School of Finance (VGSF)

Olivia S. Mitchell

University of Pennsylvania - The Wharton School; University of Pennsylvania - The Wharton School, Pension Research Council; National Bureau of Economic Research (NBER)

Jacqueline Volkman Wise

Saint Joseph's University - Haub School of Business

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Abstract

We model how asset allocation decisions in a defined contribution (DC) pension plan might vary with participants' attitudes about risk and regret. We show that anticipated disutility from regret can have a potent effect on investment choices. Compared to a risk-averse investor, the investor who takes regret into account will hold more stock when the equity premium is low but less stock when the equity premium is high.

We also assess how regret can influence a DC plan participant's view of rate-of-return guarantees, as measured by his willingness-to-pay. We find that regret increases the regret-averse investor's willingness to pay for a guarantee when the portfolio is relatively risky but decreases it when the portfolio is relatively safe.

Suggested Citation

Muermann, Alexander and Mitchell, Olivia S. and Volkman Wise, Jacqueline, Regret, Portfolio Choice, and Guarantees in Defined Contribution Schemes. Insurance: Mathematics and Economics, Forthcoming, Pension Research Council WP2005-17, Available at SSRN: https://ssrn.com/abstract=918025

Alexander Muermann (Contact Author)

WU (Vienna University of Economics and Business) ( email )

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Olivia S. Mitchell

University of Pennsylvania - The Wharton School ( email )

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University of Pennsylvania - The Wharton School, Pension Research Council ( email )

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National Bureau of Economic Research (NBER)

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Jacqueline Volkman Wise

Saint Joseph's University - Haub School of Business ( email )

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