Target-Driven Investing : Optimal Investment Strategies in Defined Contribution Pension Plans Under Loss Aversion

Assuming loss aversion, stochastic investment and labor income processes, and a path-dependent target fund, we show that the optimal investment strategy for defined contribution pension plan members is a target-driven 'threshold' strategy. With this strategy, the equity allocation is increased if the accumulating fund is below target and decreased if it is above. However, if the fund is sufficiently above target, the optimal investment strategy switches discretely to 'portfolio insurance'. We show that under loss aversion, the risk of failing to attain the target replacement ratio is significantly reduced compared with target-driven strategies derived from maximizing expected utility

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Year of publication:	2011
Authors:	Blake, David P.
Other Persons:	Wright, Douglas (contributor) ; Zhang, Yumeng (contributor)
Publisher:	[2011]: [S.l.] : SSRN
Subject:	Portfolio-Management \| Portfolio selection \| Pensionskasse \| Pension fund \| Anlageverhalten \| Behavioural finance \| Risikoaversion \| Risk aversion \| Kapitalanlage \| Financial investment \| Betriebliche Altersversorgung \| Occupational pension plan \| Altersvorsorge \| Retirement provision \| Investition \| Investment \| Prospect Theory \| Prospect theory \| Institutioneller Investor \| Institutional investor

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