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Communication and personal selection of pension saver's financial risk

Gerrard, R. J. G. ORCID: 0000-0002-8932-8752, Hiabu, M., Kyriakou, I. ORCID: 0000-0001-9592-596X & Nielsen, J. P. ORCID: 0000-0002-2798-0817 (2019). Communication and personal selection of pension saver's financial risk. European Journal of Operational Research, 274(3), pp. 1102-1111. doi: 10.1016/j.ejor.2018.10.038

Abstract

The paper shows how to reform the platform of pension products so that pension savers, professional financial advisors, actuaries and investment experts intuitively understand the underlying financial risk of the optimal investment profile. It is also pointed out that an excellent optimal investment strategy can destroy the future expected utility of a pension saver if the financial communication is wrong. It is shown that a simple system with an upper and a lower bound, originally inspired by Merton (2014), which can be executed easily using fintech, can replace complicated power utility optimization for the pension saver so that everyone can exactly understand the amount of financial risk taken. The paper focuses on investing money as a lump sum because being able to communicate the associated financial risk can serve as the first step towards communicating more complex pension saving structures.

Publication Type: Article
Additional Information: © 2018. This manuscript version is made available under the CC-BY-NC-ND 4.0 license http://creativecommons.org/licenses/by-nc-nd/4.0/
Publisher Keywords: Investment analysis, Finance, Utility theory, Risk management, OR in banking
Subjects: H Social Sciences > HG Finance
Departments: Bayes Business School > Actuarial Science & Insurance
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