<aside> 💡 Based from Coursera MOOC 2: Module 2 and Live Lecture on 15 November 2023 (as applicable). Unnecessary chatter and irrelevant details are filtered out.
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Learning Objectives:
LO#1: Identify key behavioral biases in investment decisions in pension plans
LO#2: Explain familiarity bias and background risk
LO#3: Appreciate the value of annuities in retirement planning
LO#1
Representativeness
Familiarity LO#2
Endorsement Effect
Naïve Diversification ("1/n" investing)
Inertia
Option Confusion
Power of Defaults
Over-extrapolate past events into the future
misinterpreting casual knowledge of an investment/firm as a reduction in the risk of that investment/firm
Example: In a survey, Own-company stock consistently rated as the investment option with which participants are the most familiar
firm's choice of pension plan structure (type of investment options available, whether firm contributes company stock or cash to plan) = how to invest
Example: participants at firms that provide an employer matching contribution in company stock invest more of their own contributions in company stock (NOT LESS) - NOT portfolio diversification
composition of portfolio choices.
a type of endorsement effect
“Do not put eggs in one basket”
highlights importance of participants making a sound portfolio allocation at the start.
power of “defaults” in influencing behaviors.
“sticking with that”
Participants presented with too many investment options less likely to participate at all in DC pension plan
presented with too many investment options, if they do participate in plan, select a familiar option like company
reasonable investment decisions
automatic enrollment