Many people fail to save what they will need for retirement. Research on excessive discounting of the future suggests that removing the lure of immediate rewards by precommitting to decisions or ...elaborating the value of future rewards both can make decisions more future oriented. The authors explore a third and complementary route, one that deals not with present and future rewards but with present and future selves. In line with research that shows that people may fail, because of a lack of belief or imagination, to identify with their future selves, the authors propose that allowing people to interact with age-progressed renderings of themselves will cause them to allocate more resources to the future. In four studies, participants interacted with realistic computer renderings of their future selves using immersive virtual reality hardware and interactive decision aids. In all cases, those who interacted with their virtual future selves exhibited an increased tendency to accept later monetary rewards over immediate ones.
Investing for retirement is one of the most consequential yet daunting decisions consumers face. We present a way to both aid and understand consumers as they construct preferences for retirement ...income. The method enables consumers to build desired probability distributions of wealth constrained by market forces and the amount invested. We collect desired wealth distributions from a sample of working adults, provide evidence of the technique’s reliability and predictive validity, characterize individual‐ and cluster‐level differences, and estimate parameters of risk aversion and loss aversion. We discuss how such an interactive method might help people construct more informed preferences.
Investors and markets Sharpe, William F; Sharpe, William F
2011., 20110101, 2011, 2006, 2007-01-01, 20070101, Letnik:
3
eBook
InInvestors and Markets, Nobel Prize-winning financial economist William Sharpe shows that investment professionals cannot make good portfolio choices unless they understand the determinants of asset ...prices. But until now asset-price analysis has largely been inaccessible to everyone except PhDs in financial economics. In this book, Sharpe changes that by setting out his state-of-the-art approach to asset pricing in a nonmathematical form that will be comprehensible to a broad range of investment professionals, including investment advisors, money managers, and financial analysts. Bridging the gap between the best financial theory and investment practice,Investors and Marketswill help investment professionals make better portfolio choices by being smarter about asset prices.
Based on Sharpe's Princeton Lectures in Finance,Investors and Marketspresents a method of analyzing asset prices that accounts for the real behavior of investors. Sharpe makes this technique accessible through a new, one-of-a-kind computer program (available for free on his Web site, at http://www.stanford.edu/~wfsharpe/apsim/index.html) that enables users to create virtual markets, setting the starting conditions and then allowing trading until equilibrium is reached and trading stops. Program users can then analyze the final portfolios and asset prices, see expected returns, and measure risk.
In addition to popularizing the most sophisticated form of asset-price analysis,Investors and Marketssummarizes much of Sharpe's most important previous work and reflects a lifetime of thinking about investing by one of the leading minds in financial economics. Any serious investment professional will benefit from Sharpe's unique insights.
This article proposes an asset allocation policy that adapts to market movements
by taking into account changes in the outstanding market values of major asset
classes. Such a policy considers ...important information, reduces or avoids
contrarian behavior, and can be followed by a majority of investors.
Many institutional and individual investors adopt asset allocation policies that
call for investing a specified percentage of the total value of a portfolio in
each of several asset classes. To conform with such a policy as market values
change requires selling assets that performed relatively well and buying those
that performed relatively poorly. Such a strategy is clearly contrarian and can
be followed by only a minority of investors. In practice, many investors seldom
rebalance completely to conform with such a policy. But many multi-asset mutual
funds, increasingly used in defined-contribution plans, do so frequently, which
results in contrarian behavior.
From January 1976 through June 2009, the ratio of the market value of U.S. stocks
to the sum of the market values of U.S. stocks and bonds averaged 60.7 percent,
close to the traditional 60/40 stock/bond mix. But during this period, the
proportion in stocks ranged from slightly more than 43 percent to more than 75
percent. A fund that rebalanced its holdings frequently to a 60/40 mix would
thus range from being considerably more risky than the U.S. bond and stock
markets to being considerably less risky. If its goal was to represent the U.S.
market of such instruments, it should instead have adjusted its asset allocation
policy to reflect the relative values of the two asset classes.
More generally, it seems appropriate for any fund to adapt its asset allocation
policy from time to time in light of current relative market values of asset
classes. This adaptation can be done by periodically conducting a reverse
optimization analysis, in which current asset values are used to adjust asset
risk and return forecasts, and then computing a new asset allocation by using
these forecasts in an optimization analysis. This article proposes a much
simpler approach in which an asset allocation policy adapts to market movements
by taking into account changes in the outstanding market values of major asset
classes. Such adaptive asset allocation policies consider important information,
reduce or avoid contrarian behavior, and can be followed by a majority of
investors.
Recent regulatory changes have brought a renewed focus on the impact of investment expenses on investors' financial well-being. The author offers methods for calculating relative terminal wealth ...levels for those investing in funds with different expense ratios. Under plausible conditions, a person saving for retirement who chooses low-cost investments could have a standard of living throughout retirement more than 20% higher than that of a comparable investor in high-cost investments.
At the 67th CFA Institute Annual Conference, held 4–7 May 2014 in Seattle, Robert Litterman interviewed William F. Sharpe to elicit his perspective on a number of investment issues, including the ...capital asset pricing model, asset allocation, behavioral finance, and retirement income.
Most asset allocation analyses use the mean--variance approach for analyzing the trade-off between risk and expected return. Analysts use quadratic programming to find optimal asset mixes and the ...characteristics of the capital asset pricing model to determine reasonable optimization inputs. This article presents an alternative approach in which the goal of asset allocation is to maximize expected utility, where the utility function may be more complex than that associated with mean--variance analysis. Inputs for the analysis are based on the assumption of asset prices that would prevail if there were a single representative investor who desired to maximize expected utility.
This paper uses a discrete‐time, discrete‐state Monte Carlo simulation model to evaluate representative strategies for investing and spending a fixed sum designed to fund consumption during the ...period after retirement. Two assets are considered – one providing a riskless real return, the other a market portfolio of bonds and stocks. A stochastic process for the returns from the market portfolio is proposed. Then a set of Arrow‐Debreu state prices is obtained on the assumption that the market portfolio is an efficient investment strategy. The model is used to forecast ranges of consumption and ranges of the ratios of year‐to‐year consumption, and also to estimate the values of components of future consumption.
The characteristics of the "risk-adjusted rating" (RAR) on which Morningstar bases its "star ratings" and "category ratings" are analyzed, and the RAR is compared with more traditional mean-variance ...measures. The RAR measure has characteristics similar to those of an expected utility function based on an underlying bilinear utility function. These characteristics are of some concern because strict adherence to maximizing expected utility with such a function could lead to extreme investment strategies. This study finds that Morningstar varies one of the parameters of this function in a manner that frequently produces results similar to the results of using the excess-return Sharpe ratio. Finally, the argument is presented that neither Morningstar's measure nor the excess-return Sharpe ratio is an efficient tool for choosing mutual funds within peer groups for a multifund portfolio.
PDF
