Are we building portfolios for investors or for fund managers? Behavioural Finance Implications in Superannuation Investing.

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Are we building portfolios for investors or for
fund managers?Behavioural Finance Implications
in Superannuation Investing.

• University of New South Wales
• John Livanas

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Central Concept
4,000 Investment Switches
Assess correlation of investment decisions with
age, gender, market
100,000 Super Investors
202 First Time Investment Switches
Assess impact of first time choice
236 Survey Data
Establish Utility
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Standardised Risk Return Concepts

• Consistent Method of assigning values to
  Riskiness for quantitative analysis

Portfolio Names Typical Assets held Relative Risk Value
High Growth 85-90 Equities, Property 1
Trustee Selection 75 - 85 Equities, Property 0
Diversified 65-70 Equities, Property -1
Balanced 45-55 Equities, Property, with the remainder in Bonds, Cash -2
Capital Guarded lt15 Equities, Property, with the remainder in Bonds, Cash -3
Cash Largely Cash with possibly some short-dated Bonds -4

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Risk Shifts and Market (after notional
carry-costs)
Period Ave. Risk Shift Ave. Money Weighted Risk Shift
Pre 1/3/2005 1.869 37,763
Post 1/3/2005 1.922 64,693
Investors seem to take the lead from the market
believing that the market trend itself provides
information
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Correlation of First-Time Risk Shifts and Age
Events seem to trigger Rational Behaviour
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Utility Curves for Return
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Utility Curves for Risk
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Utility Curves for Time Horizon
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Quantifying the utilities
E(R) pE(R) E(Z) pE(Z) E(T) pE(H)
3.9 -1.352 no chance 1.425 1 year -0.008
6.0 - 6.3 0.121 13 chance 0.295 3 year 0.009
6.5 - 7.2 0.083 20 chance -0.153 5 year 0.177
7.2 - 8.1 0.375 25 chance -0.479 10 year -0.178
8.0 - 9.0 0.774 33 chance -1.087    
Consequently, for the state s1, for all Cs 1,
(5) solves as 0.375-1.087-0,008 -1.013
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Adding the Partial Utilities
Partial Utilities of Risk Partial Utilities of Risk 1.425 0.295 -0.153 -0.479 -1.087
Partial Utilities of Risk Partial Utilities of Risk 0 13 20 25 33
Partial Utilities of Return Partial Utilities of Return
-1.352 3.90 0.07 -1.06 -1.51 -1.83 -2.44
0.121 6.15 1.55 0.42 -0.03 -0.36 -0.97
0.083 6.85 1.51 0.38 -0.07 -0.40 -1.00
0.375 7.65 1.80 0.67 0.22 -0.10 -0.71
0.774 8.50 2.20 1.07 0.62 0.29 -0.31
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Risk Return isoutilities
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Risk Return Isoutilities as a plane