Prudent investment for agents with unstable preferences in an uncertain world

The goal of this research project is to investigate the scope for devising robust investment strategies that “age well” with participants, taking into account individual preferences, their evolution, and the fact that preference measurements will be noisy. Some focal questions will be the following: Given the potential time consistency problems and the non-negligible individual economic uncertainty, how crucial is personalization of investment strategies for younger participants? How large are the potential benefits, how realistic is it that early decisions will be regretted later on? What is the impact of uncertainty in the preference elicitation? Are there particular types of participants that deserve particular attention, e.g. with respect to human capital? Should there be different limits to the amount of personalization at different ages? Can instruments like the fixed first pillar AOW pension help to mitigate potential consistency problems due to evolving preferences?

This research will follow a theoretical, model-based approach using simulated scenarios of both the economy and individual preferences. The first part of the analysis will be a sensitivity analysis along the following lines: Fix a participant at an intermediate age, say 50 or 60, and suppose preferences have by now stabilized. How sensitive is this participant’s pension outlook to decisions made at earlier ages? How large is the potential impact of welfare loss due to ex-post suboptimal decisions compared to, e.g., the impact of economic uncertainty? In a second, more exploratory part of the analysis, we plan to take evolving preferences into account more explicitly, investigating the scope for balancing the regret participants experience at different stages in their development.

Read the paper here.