A Multi-Objective Decision Framework for Lifecycle Investment

17 Pages Posted: 20 Sep 2017

See all articles by Sjoerd Timmermans

Sjoerd Timmermans

Algemene Pensioen Groep (APG)

J. M. Schumacher

University of Amsterdam - Department of Quantitative Economics (KE)

Eduard H.M. Ponds

Algemene Pensioen Groep (APG); Tilburg University - Department of Economics; Netspar; Tilburg University - Center for Economic Research (CentER)

Date Written: September 18, 2017

Abstract

In this paper we propose a multi-objective decision framework for lifecycle investment choice. Instead of optimizing individual strategies with respect to a single-valued objective, we suggest evaluation of classes of strategies in terms of the quality of the tradeoffs that they provide. The proposed framework takes inspiration from psychological theories which, on the one hand, assert that humans analyze risky choice situations in terms of several competing factors, and, on the other hand, recognize that attribute overload is detrimental to decision making. In particular, we use SP/A (security-potential/aspiration) theory as developed by Lopes and co-authors. The proposed approach is illustrated in a simple lifecycle model. As decision factors, we consider (a) the contribution paid, (b) the ambition level (targeted level of retirement income), and (c) the guarantee level (a level of retirement income that will be achieved with high probability). In terms of the tradeoffs generated between these indices, we compare a class of traditional lifecycle strategies, defined in terms of a glide path, with a class of so called collar strategies.

Keywords: Pension Plan Design, Choice Architecture, Lifecycle Investment, Dynamic Asset Allocation

JEL Classification: D81, G41, D15, H55

Suggested Citation

Timmermans, Sjoerd and Schumacher, J.M. (Hans) and Ponds, Eduard H.M., A Multi-Objective Decision Framework for Lifecycle Investment (September 18, 2017). Available at SSRN: https://ssrn.com/abstract=3038803 or http://dx.doi.org/10.2139/ssrn.3038803

Sjoerd Timmermans

Algemene Pensioen Groep (APG) ( email )

P.O. Box 75283
Amsterdam, 1070 AG
Netherlands

J.M. (Hans) Schumacher (Contact Author)

University of Amsterdam - Department of Quantitative Economics (KE) ( email )

Roetersstraat 11
Amsterdam, 1018 WB
Netherlands

Eduard H.M. Ponds

Algemene Pensioen Groep (APG) ( email )

P.O. Box 75283
Amsterdam, 1070 AG
Netherlands

Tilburg University - Department of Economics

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Netspar

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Tilburg University - Center for Economic Research (CentER) ( email )

Tilburg

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