Trond M. Døskeland

Optimal Pension Insurance Design

In this paper we analyze how the traditional life and pension contracts with a guaranteed rate of return can be optimized to increase customers’ welfare. Given that the contracts have to be priced correctly, we use individuals’ preferences to find the preferred design. Assuming CRRA utility, we cannot explain the existence of any form of guarantees. Through numerical solutions we quantify the difference (measured in certainty equivalents) to the preferred Merton solution of direct investments in a fixed proportion of risky and risk free assets. The largest welfare loss seems to come from the fact that guarantees are effective by the end of each year, not only by the expiry of the contract. However, the demand for products with guarantees may be explained through behavioral models. We use cumulative prospect theory as an example, showing that the optimal design is a simple contract with a life-time guarantee and no default option.

Investing with Brain or Heart? A Field Experiment on Responsible Investment

Socially responsible investment is increasingly prevalent in financial markets and is characterized by the integration of financial and nonfinancial objectives. This paper investigates the influence of wealth concerns and moral concerns on individual investors’ decisions to invest responsibly. We conduct a unique natural field experiment of investors in an online banking context, wherein we frame responsible investment with regard to either wealth or morality and study investors’ subsequent behavior. We find that wealth framing is more effective than moral framing for both information search and investment behavior. Our study contributes to the literature by providing real-life insight into how prosocial decision making in financial markets can be promoted. This paper was accepted by John List, behavioral economics .

Investment Strategy of Sovereign Wealth Funds

Sovereign wealth funds (SWF) are a new name for assets held by governments in another country’s currency. These funds are growing at an unprecedented rate and are becoming important players in global financial markets. In this paper, I describe how these funds are being invested and I develop a classification of investment options available for sovereign wealth funds.

How do Analysts Process Pension Information

Recent studies (e.g., Picconi (2006) and Coronado et al. (2008)) show that significant economic information such as pension information is not incorporated into analysts’ forecasts and stock prices. This result comes from studies which correlate different pension variables with analysts’ earnings forecasts or stock prices. However, little is known about why the analysts get pensions wrong. Therefore, by interviewing and physically inspecting the analysts’ spreadsheets, we shed some light on the analysts’ information process. To examine how analysts utilize pension information we investigate two distinct tasks they may perform, 1) replace the recognized net pension assets found in the balance sheet with the unrecognized net pension assets disclosed in the notes, and 2) recalculate the pension liabilities. There is a reward for the analysts to use correct pension information since the firms we investigate have abnormal pension assumptions. However, we found that analysts do not incorporate relevant pension information into their valuation spreadsheets.