Design of Investment Options using Utility Functions: A Demonstration for ‘MyRetirement’ Products
22 Pages Posted: 1 Jan 2020
Date Written: December 16, 2019
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: Suggested Citation