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MIS 4500 (31)
Lecture 11

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University of Manitoba
Management Info. Systems
MIS 4500
Pourang Irani

Lecture 11: Investment Decision Making in Defined Contribution Pension Plans Bounded Rationality: limits on intelligence and time Bounded self-control: fail to do the apparent right thing Bounded self-interest; “myopic loss aversion”: seeking to avoid short-term losses, despite the long time horizon usually involved in planning for retirement Failure to diversify:  “1/n diversification heuristic”: split contributions equally amongst the n funds on offer, w/ little regard to underlying asset composition of the funds. i. “endorsement effect”: the entire selection of assets is seen as implicit guidance from employer as to appropriate asset allocation strategy  “too much choice”: negative relationship b/w # of funds on offer and employee participation  Too much own-company stock; don’t realize it is riskier; preference to “invest in the familiar”/”home country bias”; also “endorsement effect” Employer may paternalistically design plan to maximize chance that most appropriate options are taken: opt-out rather than opt-in; default contribution rates; default fund options and range and nature of fund choice on offer; nature of info and advice UK: DB plans: group personal pension (GPP) and stakeholder plans; DC plans: occupational money purchase (OMP)  more common that there is “too little choice”  no “own-company stock” problem “Those who have knowledge don’t predict. Those who predict don’t have knowledge.” Economists seem to lag reality; inflation forecasts appear to be largely a function of past inflation rates: adaptive expectations. Overconfidence as Driver of Poor Forecasting:  overconfident: surprised more often that they expect to be; “not well calibrated”  experts more overconfident than lay people i. illusion of knowledge: we think we kno
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