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A behavioral portfolio analysis of retirement portfolios

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  • Singer, Nico

Abstract

To most individuals saving for retirement is the number one financial goal. However, it reveals a complex task and induces serious behavioral problems which cannot be explained by traditional economic theory. This paper investigates the role of behavioral asset selection on retirement portfolios in Germany. Simulated behavioral portfolios show (i) an impact of emotions since pessimism (optimism) induces the most conservative (aggressive) portfolio, (ii) concentrated portfolios with a large position in only one secure asset and a small position in a risky portfolio, and (iii) a large difference to mean-variance portfolios in terms of level of diversification. I conclude that behavioral portfolio theory has remarkably power in understanding, describing and selecting retirement portfolios in Germany. The results have several implication for financial planning, e.g. for an auto-pilot solution to encourage people to more retirement saving. --

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Bibliographic Info

Paper provided by University of Rostock, Institute of Economics in its series Thuenen-Series of Applied Economic Theory with number 104.

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Date of creation: 2011
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Handle: RePEc:zbw:roswps:104

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Related research

Keywords: behavioral portfolio choice; decision making under risk; retirement portfolios;

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References

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  1. William M. Raike, 1970. "Dissection Methods for Solutions in Chance Constrained Programming Problems Under Discrete Distributions," Management Science, INFORMS, INFORMS, vol. 16(11), pages 708-715, July.
  2. Singer, Nico, 2010. "Safety-first portfolio optimization: Fixed versus random target," Thuenen-Series of Applied Economic Theory 113, University of Rostock, Institute of Economics.
  3. Pablo AntolĂ­n & Edward R. Whitehouse, 2009. "Filling the Pension Gap: Coverage and Value of Voluntary Retirement Savings," OECD Social, Employment and Migration Working Papers 69, OECD Publishing.
  4. Drazen Prelec, 1998. "The Probability Weighting Function," Econometrica, Econometric Society, Econometric Society, vol. 66(3), pages 497-528, May.
  5. Shefrin, Hersh & Statman, Meir, 2000. "Behavioral Portfolio Theory," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 35(02), pages 127-151, June.
  6. Kroll, Yoram & Levy, Haim & Rapoport, Amnon, 1988. "Experimental Tests of the Separation Theorem and the Capital Asset Pricing Model," American Economic Review, American Economic Association, American Economic Association, vol. 78(3), pages 500-519, June.
  7. Blume, Marshall E & Friend, Irwin, 1975. "The Asset Structure of Individual Portfolios and Some Implications for Utility Functions," Journal of Finance, American Finance Association, American Finance Association, vol. 30(2), pages 585-603, May.
  8. Das, Sanjiv & Markowitz, Harry & Scheid, Jonathan & Statman, Meir, 2010. "Portfolio Optimization with Mental Accounts," Journal of Financial and Quantitative Analysis, Cambridge University Press, Cambridge University Press, vol. 45(02), pages 311-334, April.
  9. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, American Finance Association, vol. 7(1), pages 77-91, 03.
  10. Milton Friedman & L. J. Savage, 1948. "The Utility Analysis of Choices Involving Risk," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 56, pages 279.
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