This project seeks to identify portfolio management strategies that are optimal for endowment and retirement planning. Endowed institutions and retirees have a shared preference to avoid spending cuts at the expense of foregoing spending increases -- shortfall aversion. A central aspect of retirement planning is the role of health spending in extending life spans, which is still poorly understood and largely ignored in standard models. Graduate students will be trained as part of the project.
Shortfall aversion introduces a novel aspect of preferences, distinct from usual risk aversion, and leads to different implications for investment and spending policies. Retirement planning problems lead to a rich class of new models, in which agents can reduce their mortality through investment in health at the expense of current consumption. Such models have the potential to explain the low annuitization observed in reality, and bear on several questions for retirement planning, such as the relation between wealth and longevity and the dynamics of medical expenses.
