Evaluating Retirement Strategies: A Utility-Based Approach

Choosing and Using Utility Functions in Forming Portfolios

“…A number of authors have used utility functions to evaluate portfolios in an applied context. For instance, retirement outcomes were analyzed by Blake, Wright, and Zhang (2013), who used a variation of the value function from the prospect theory of Tversky and Kahneman (1992); by Levy (2016), who used power, log, and prospect theory utility; by Bell, Liu, andShao (2017a, 2017b), who used power utility plus a bequest term; and by Estrada and Kritzman (2018), who proposed a kinked utility function reflecting power utility above target consumption and a linear penalty below. The present study contributes by demonstrating how a utilitybased approach might be implemented by industry practitioners to cater to a wide variety of investors with specific objectives and preferences.…”

“…Such functions may be more suitable than power utility for an investor with an objective that entails achieving some target. Various authors have proposed functions that define utility with reference to a wealth or return target-for example, Hogan and Warren (1972), Fishburn (1977), Holthausen (1981), Stutzer (2003), Kahneman and Tversky (1979), Tversky and Kahneman (1992), Anthonisz (2012), and Estrada and Kritzman (2018). Furthermore, experimental studies support the idea that many investors perceive risk as related to shortfall versus some reference point (see Unser 2000 andVeld andVeld-Merkoulova 2008).…”

On the benefits of pension plan consolidation: Understanding the impact of full plan mergers

“…This is not the first use of utility functions for forming portfolios in the literature (see, e.g. Adler & Kritzman, 2007;Blake et al, 2013;Levy, 2016;Estrada & Kritzman, 2018).…”