Personal characteristics and robust life-cycle investments

The Future Pensions Act (Wtp) states that pension providers must invest on the basis of the risk attitude of the participants. A great deal of attention is therefore paid to eliciting risk preferences. A concern when eliciting risk preferences is whether a method actually delivers the true ‘gamma’ that is modeled for risk aversion. As a result, the estimated parameters from the risk preference studies remain open to different interpretations.

In this project we contribute to this discussion by taking the opposite route. We analyze different preference and belief models, and provide an overview in which we clearly indicate how the optimal investment policy depends on these assumed parameters (i.e. individual characteristics). Our goal is to investigate which parameters have a major influence and therefore need to be properly estimated, and which parameters have less impact. This allows us to construct a robust life-cycle investment strategy that deviates as little as possible from the various optimal investment strategies and thus minimizes ‘error’ that occurs because an incorrect model is assumed.