18 Pages Posted: 2 Nov 2005
Date Written: 2005
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: Suggested Citation
Muermann, Alexander and Mitchell, Olivia S. and Volkman Wise, Jacqueline, Regret, Portfolio Choice, and Guarantees in Defined Contribution Schemes (2005). Pension Research Council WP2005-17. Available at SSRN: https://ssrn.com/abstract=830048 or http://dx.doi.org/10.2139/ssrn.830048