Document Type
Working Paper
Date of this Version
9-1-2005
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.
Keywords
Regret, Investment, Retirement Saving, Guarantee
JEL Code
G11, G23, D81
Working Paper Number
WP2005-17
Copyright/Permission Statement
All findings, interpretations, and conclusions of this paper represent the views of the author(s) and not those of the Wharton School or the Pension Research Council. Copyright 2005 © Pension Research Council of the Wharton School of the University of Pennsylvania. All rights reserved.
Acknowledgements
Funding for this research was provided by the Social Security Administration through a grant to the Michigan Retirement Research Center (MRRC), and by the Pension Research Council. An earlier version of this paper appeared as MRRC working paper 2003-060, October 2003, under the title “The Demand for Guarantees in Social Security Personal Retirement Accounts”. For helpful suggestions we thank Marie-Eve Lachance.
Date Posted: 30 August 2019