Design of Investment Options using Utility Functions: A Demonstration for ‘MyRetirement’ Products

22 Pages Posted: 1 Jan 2020

See all articles by Geoff Warren

Geoff Warren

Australian National University (ANU) - Research School of Finance, Actuarial Studies and Statistics

Date Written: December 16, 2019

Abstract

Utility functions can assist in designing a menu of investment options by encoding the objectives and preferences for various investor types with the aim of developing suitably tailored products. This paper demonstrates the process through the construction of an illustrative menu of Australian MyRetirement products. The demonstration shows how utility-based analysis can be combined with more traditional metrics to compare strategies and convey their implications; and provides direction on how product options might be presented to a retiring member. Central to the process is characterizing investor types by selected attributes. This both facilitates specifying utility functions for use in product development, and supports communication based around the type of investor for which a product is designed along with its key features and the outcomes it may deliver. Utility functions thus provide the mechanics that drive the analysis, without becoming an explicit component of investor engagement.

Keywords: Retirement, pensions, portfolio construction, utility functions, investment products, behavioral

JEL Classification: D14, D81, D91, G11, G23

Suggested Citation

Warren, Geoffrey J., Design of Investment Options using Utility Functions: A Demonstration for ‘MyRetirement’ Products (December 16, 2019). Available at SSRN: https://ssrn.com/abstract=3504313 or http://dx.doi.org/10.2139/ssrn.3504313

Geoffrey J. Warren (Contact Author)

Australian National University (ANU) - Research School of Finance, Actuarial Studies and Statistics ( email )

CBE Building 26C
Kingsley Sreet, Acton
Canberra, ACT 0200
Australia

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