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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.

Suggested Citation

  • Singer, Nico, 2011. "A behavioral portfolio analysis of retirement portfolios," Thuenen-Series of Applied Economic Theory 104, University of Rostock, Institute of Economics.
  • Handle: RePEc:zbw:roswps:104
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    References listed on IDEAS

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    3. Blume, Marshall E & Friend, Irwin, 1975. "The Asset Structure of Individual Portfolios and Some Implications for Utility Functions," Journal of Finance, American Finance Association, vol. 30(2), pages 585-603, May.
    4. Singer, Nico, 2010. "Safety-first portfolio optimization: Fixed versus random target," Thuenen-Series of Applied Economic Theory 113, University of Rostock, Institute of Economics.
    5. Das, Sanjiv & Markowitz, Harry & Scheid, Jonathan & Statman, Meir, 2010. "Portfolio Optimization with Mental Accounts," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 45(02), pages 311-334, April.
    6. Harry Markowitz, 1952. "Portfolio Selection," Journal of Finance, American Finance Association, vol. 7(1), pages 77-91, March.
    7. Pablo Antolín & 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.
    8. Drazen Prelec, 1998. "The Probability Weighting Function," Econometrica, Econometric Society, vol. 66(3), pages 497-528, May.
    9. Milton Friedman & L. J. Savage, 1948. "The Utility Analysis of Choices Involving Risk," Journal of Political Economy, University of Chicago Press, vol. 56, pages 279-279.
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    12. Allais Maurice, 1990. "Cardinal Utility," Journal des Economistes et des Etudes Humaines, De Gruyter, vol. 1(2), pages 1-38, June.
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    More about this item

    Keywords

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

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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