Decision Support for Retirement Portfolio Management: Overcoming Myopic Loss Aversion via Technology Design

Abstract

As firms continue to abandon pensions in favor of employee-managed retirement plans, tremendous demands are being placed on the decision-making proficiency of future retirees. As reflected in the equity premium puzzle, individual investors tend to hold overly conservative portfolios that provide meager payoffs over time. Consequently, there is growing concern that the vast majority of retirement accounts might be insufficiently funded when employees reach retirement. Given that most retirement plans can now be managed online, a potential solution lies in designing a Web-based decision support system (DSS) that helps future retirees make more-profitable portfolio management decisions. This paper reports the results of a study in which 159 retirement plan participants were asked to use an experimental website to manage a portfolio of retirement investments over a simulated 30-year period. Using a psychological approach toward designing the DSS, myopic loss aversion is put forth as a theoretical explanation for the psychological mechanisms that encourage investors to hold overly conservative portfolios. Armed with this knowledge, three design features--information horizon, system restrictiveness, and decisional guidance--are implemented as part of an overarching design strategy targeted at increasing investors' willingness to take calculated risks. The results indicate that investor conservatism diminishes when the DSS presents prospective probabilities and payoffs over long time horizons. In contrast, short-term information horizons constitute a major stumbling block for investors. However, when confronted with short-term information horizons, risk aversion can be successfully counteracted by configuring a DSS to either restrict the frequency of decisions or to suggest a relatively aggressive portfolio allocation. These findings carry important implications for theory and practice.decision support systems, decisional guidance, equity premium puzzle, field experiment, human-computer interaction, information horizon, myopic loss aversion, retirement planning, system restrictiveness

Overcoming Innovation Resistance beyond Status Quo Bias - A Decision Support System Approach (Research-in-Progress)

“…The purpose of DSS can be to increase the effectiveness of decisions or the efficiency of decision processes by providing decision makers with relevant information [10], [74]. DSS are designed to compensate weaknesses in human decision making by providing decisional guidance and specific system features such that finding and choosing the best option is made easier [12], [75].…”

Multi-criteria Decision Support for Investment Decisions: Examining the Interactive Effects of Risk Profile, Information Horizon, and Prospect Format

“…Derived as a slightly loss averse variant of Samuelson's wager [34], the most commonly operationalized alternative is a prospect possessing a one-third chance of gaining 250% and a two-thirds chance of losing 100% (+250%, 0.3333; -100%, 0.6667) per trial [7,16,18,19]. The second utilizes historical market data [9,28,36]. For instance, the Standard & Poors 500 Index (S&P 500) possesses a qualitatively different risk profile.…”

“…The complexities of such multi-criteria decision problems tend to be exacerbated by risk and uncertainty [14], which can vary considerably depending on the length of time over which an investment is held [28].…”

“…By providing features that enable users to compare multiple criteria and subsequently choose among alternatives, a MCDSS holds promise for guiding users toward a particular decision objective [24]. Nonetheless, implementing a MCDSS may not necessarily translate into superior decisions, as technological features can enhance or hinder decisionmaking [27,28,29,30].…”

Rational and behavioural predictors of pre-retirement cash-outs

“…These tools may assist individuals in making optimal preservation decisions at the time of a job move, which aligns with the idea of just-in-time financial education (Fernandes, Lynch, & Netemeyer, 2014). While the research in this area is limited, preliminary debiasing studies using DSS in investment and retirement decision making have produced positive results (Bhandari, Hassanein, & Deaves, 2008;Looney & Hardin, 2009). Whether the techniques can successfully be implemented in a retirement preservation decision making context has not been established.…”