Regret, Portfolio Choice, and Guarantees in Defined Contribution Schemes

18 Pages Posted: 2 Nov 2005  

Alexander Muermann

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

Olivia S. Mitchell

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

Jacqueline Volkman Wise

Temple University - Risk Management & Insurance & Actuarial Science

Multiple version iconThere are 2 versions of this paper

Date Written: 2005

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 (2005). Pension Research Council WP2005-17. Available at SSRN: https://ssrn.com/abstract=830048 or http://dx.doi.org/10.2139/ssrn.830048

Alexander Muermann (Contact Author)

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

Welthandelsplatz 1
A - 1020 Wien
Austria
+43 1 31336 4948 (Phone)
+43 1 31336 90 4948 (Fax)

Vienna Graduate School of Finance (VGSF) ( email )

Welthandelsplatz 1
A - 1020 Wien
Austria

Olivia S. Mitchell

University of Pennsylvania - The Wharton School ( email )

Philadelphia, PA 19104-6365
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Jacqueline Volkman Wise

Temple University - Risk Management & Insurance & Actuarial Science ( email )

Fox School of Business and Management
1301 Cecil B. Moore Ave.
Philadelphia, PA 19122
United States

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