Decision analysis using targets instead of utility functions

Bordley, Robert F.; LiCalzi, Marco

doi:10.1007/s102030050005

Cited by 158 publications

(96 citation statements)

References 31 publications

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“…The idea that people act by following subjective targets is accepted in the decision theory literature. For example, Kahneman and Tversky (1979) support the use of targets in the cost function, and, more recently, Bordley and Li Calzi (2000) investigate and support the target-based approach in decision making under uncertainty. Another example of the use of the targets in an insurance context is provided by Browne (1995), who derives optimal investment policies by minimizing the probability that the wealth hits a certain bottom level (ruin) before hitting a certain upper level (target).…”

Section: The Modelmentioning

confidence: 99%

Optimal investment choices post-retirement in a defined contribution pension scheme

Gerrard

Haberman

Vigna

2004

Insurance: Mathematics and Economics

111

116

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This is the accepted version of the paper.This version of the publication may differ from the final published version. Permanent repository link AbstractIn defined contribution pension schemes, the financial risk is borne by the member. Financial risk occurs both during the accumulation phase (investment risk) and at retirement, when the annuity is bought (annuity risk). The annuity risk faced by the member can be reduced through the "income drawdown option": the retiree is allowed to choose when to convert the final capital into pension within a certain period of time after retirement. In some countries, there is a limiting age when annuitization becomes compulsory (in UK this age is 75). In the interim, the member can withdraw periodic amounts of money to provide for daily life, within certain limits imposed by the scheme's rules (or by law).In this paper, we investigate the income drawdown option and define a stochastic optimal control problem, looking for optimal investment strategies to be adopted after retirement, when allowing for periodic fixed withdrawals from the fund. The risk attitude of the member is also considered, by changing a parameter in the disutility function chosen. We find that there is a natural target level of the fund, interpretable as a safety level, which can never be exceeded when optimal control is used.Numerical examples are presented in order to analyse various indices -relevant to the pensioner -when the optimal investment allocation is adopted. These indices include, for example, the risk of outliving the assets before annuitization occurs (risk of ruin), the average time of ruin, the probability of reaching a certain pension target (that is greater than or equal to the pension that the member could buy immediately on retirement), the final outcome that can be reached (distribution of annuity that can be bought at limit age), and how the risk attitude of the member affects the key performance measures mentioned above.Keywords: income drawdown option, stochastic optimal control, decumulation phase, immediate annuitization.JEL classification: C61, G11, J26.We gratefully acknowledge the interesting observations made by the participants of the 7 th IME Congress, Lyon, and of the 13 th AFIR Colloquium, Maastricht. A special thanks goes to Andrew Cairns, Bjarne Højgaard and an anonymous referee, for their valuable and useful comments.

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Section: The Modelmentioning

confidence: 99%

Optimal investment choices post-retirement in a defined contribution pension scheme

Gerrard

Haberman

Vigna

2004

Insurance: Mathematics and Economics

111

116

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“…Benchmarking is a prescriptive target-based model that satisfies von Neumann and Morgenstern (1947)'s and Savage (1954)'s axiomatization through a probabilistic and intuitive interpretation of the expected utility of a lottery X; see Castagnoli and LiCalzi (1996), Bordley and LiCalzi (2000). They show that the expected utility of a lottery X can be read as the probability that X outperforms a stochastically independent target T with c…”

Section: Confidence Miscalibration: the Benchmarking Proceduresmentioning

confidence: 99%

A Target-Based Foundation for the “Hard-Easy Effect” Bias

Bordley

LiCalzi

Tibiletti

2016

Country Experiences in Economic Development, Management and Entrepreneurship

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“…The best prospect will be the one that maximizes P(T ≤ X). Such an approach was proposed by Bordley, Li Calzi, and Castagnoli (see [4,5]). Some related ideas were already around in the economic literature in the past and other interesting developments appeared in the subsequent years, especially for what concerns the multi-attribute setting.…”

Section: Example 5 Copulas Of Order Statisticsmentioning

confidence: 99%

Relations Between Stochastic Orderings and Generalized Stochastic Precedence

Santis¹,

Fantozzi²,

Spizzichino³

2015

Prob. Eng. Inf. Sci.

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Abstract. The concept of stochastic precedence between two real-valued random variables has often emerged in different applied frameworks. In this paper we consider a slightly more general, and completely natural, concept of stochastic precedence and analyze its relations with the notions of stochastic ordering. Such a study leads us to introducing some special classes of bivariate copulas. Motivations for our study can arise from different fields. In particular we consider the frame of Target-Based Approach in decisions under risk. This approach has been mainly developed under the assumption of stochastic independence between "Prospects" and "Targets". Our analysis concerns the case of stochastic dependence.

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Decision analysis using targets instead of utility functions

Cited by 158 publications

References 31 publications

Optimal investment choices post-retirement in a defined contribution pension scheme

Optimal investment choices post-retirement in a defined contribution pension scheme

A Target-Based Foundation for the “Hard-Easy Effect” Bias

Relations Between Stochastic Orderings and Generalized Stochastic Precedence

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