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How much risk can you handle? Making better investment decisions
August 25, 2008Many Americans make investment decisions with their retirement funds. But they don't always make informed judgments. A new study in the Journal of Consumer Research introduces a new tool that investors can use to choose investments based on their financial goals and risk attitudes.
Authors Daniel G. Goldstein (London Business School), Eric J. Johnson (Columbia University), and William F. Sharpe (Stanford University) developed a tool, which they call the Distribution Builder. With brief training, people can use the Distribution Builder to better understand their investment goals and trade-offs.
"We think that the Distribution Builder can function like a flight simulator, allowing investors to explore the outcomes of their decisions with only virtual outcomes," write the authors.
The Distribution Builder is an online tool that estimates the level of risk a user considers unacceptable in his or her investments by using a probability distribution. Since many employees make retirement investment decisions without understanding the complex picture of their own risk preferences, the Distribution Builder is a novel way for people to uncover their preexisting preferences. And, according to the researchers, it can also help people construct better preferences.
The researchers claim that by using the tool, investors can become more actively involved in the process of deciding where and how much to invest. They also believe investment management companies could use the tool to better serve their investors.
The Distribution Builder may have applications that reach beyond retirement investments. "Beyond financial services, the basic DB framework could be used to study other consumer choices in which there is a risk-reward tradeoff, including waiting times at health clinics (or on customer support lines), delivery times of packages, and overage charges for mobile-phone plans," they conclude.
University of Chicago Press Journals
The Distribution Builder is an online tool that estimates the level of risk a user considers unacceptable in his or her investments by using a probability distribution. Since many employees make retirement investment decisions without understanding the complex picture of their own risk preferences, the Distribution Builder is a novel way for people to uncover their preexisting preferences. And, according to the researchers, it can also help people construct better preferences.
The researchers claim that by using the tool, investors can become more actively involved in the process of deciding where and how much to invest. They also believe investment management companies could use the tool to better serve their investors.
The Distribution Builder may have applications that reach beyond retirement investments. "Beyond financial services, the basic DB framework could be used to study other consumer choices in which there is a risk-reward tradeoff, including waiting times at health clinics (or on customer support lines), delivery times of packages, and overage charges for mobile-phone plans," they conclude.
University of Chicago Press Journals
The Marcus Wallenberg Prize to Finland
This year's Marcus Wallenberg Prize, a major international technology award, will be awarded to Paul Olof Meinander, President of the Finnish company POM Technology Oy. The prize of 2 million Swedish Crown (219,400 euro) will be presented by King Carl XVI Gustaf in an award ceremony in Stockholm in the autumn. The National Technology Agency of Finland, Tekes, has been financing the prize-winning innovation since 1994. The prize-winning innovation enables smaller water circulations in paper machines, reduces emissions from paper manufacture and conserves energy. The POM system has been approved as an alternative to conventional solutions in the paper industry and adopted for production use in
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