“Pension plan managers can only align investment strategies with participants’ risk preferences if those preferences can be measured”
What is the focus of the paper?
The goal of the paper is to compare three methods for measuring pension plan participants’ risk aversion. These methods are compared in terms of the levels of risk aversion they obtain, how well these align with participants’ preferences, and their implications for investment decisions in pension plans. The examined methods are the Pension Builder tool, the Multiple Lottery Choices method and the Choice Sequences method.
What are the key findings?
The results show substantial differences in average risk aversion levels when using the three methods. The Pension Builder tool shows on average a higher risk aversion than the Choice Sequences and Multiple Lottery Choices methods. The latter two methods provide similar results. The correlations between the risk aversion levels from the three methods are low. And the differences translate into economically meaningful differences in pension fund investment strategies. Participants report greater satisfaction and stronger alignment with their preferences for the Pension Builder tool compared to the other two methods.
What are the implications?
- The method used to measure risk aversion has a strong impact on the results.
- Presentation features and/or cognitive processes may be driving the large differences in the measured risk aversion levels across methods.
- A deeper understanding of the source of these differences could help develop further improved methods to measure pension plan participants’ risk aversion.