1970; Merton, 1969, 1971; Samuelson, 1969; Richard, 1975; Kotlikoff and Spivak,
1981). While optimal decision rules were economically logical—such as constant,
age-invariant, proportional asset allocation for intertemporally separable constant
relative risk aversion (CRRA) utility—they often failed to mirror actual behavior.
The challenge posed to all researchers has since been to relax various rigorous
assumptions that do not hold in reality, such as intertemporally separable utility,
infinite time horizon, or perfect markets, where the individual can span all assets
including human capital, or the absence of borrowing or short-selling restrictions.
A growing body of research now offers optimal decision rules with increasing
relaxation of such assumptions. Based on realistically calibrated consumption-
saving-asset allocation intertemporal optimization models, decisions depend on
gender, education, age, human capital (i.e., the stock and riskiness of labor/pension
income and pension age), wealth, taxation, transaction costs, and the likelihood of
binding borrowing or short-selling restrictions.8 A detailed discussion of the specific
impact of these factors based on the normative model used here is given in section
3.3.
2.2.2 Individual Welfare Considerations
Section 2.1 presented evidence that individual investment behavior differs according
to various factors such as age, wealth, income, and gender. Not surprisingly, different
investment strategies lead to different wealth outcomes—for example, wealth at the
beginning of retirement. More conservative investment strategies result in lower
expected final wealth; for example, the simulation by Watson and McNaughton
(2007) shows for Australian investors that women, being more-risk averse, end up
with lower expected retirement wealth.
8 See Zeldes (1989); Deaton (1991); Carroll (1992, 1997); Hubbard, Skinner, and Zeldes
(1994, 1995); Heaton and Lucas (1997, 2000); Laibson, Repetto, and Tobacman (1998);
Viceira (2001); Campbell and Viceira (2002); Blake, Cairns, and Dowd (2003); Gomes
and Michaelides (2003, 2005); Haliassos and Michaelides (2003); Dammon, Spatt, and
Zhang (2004); Lachance (2004); Cocco (2005); Cocco, Gomes, and Maenhout (2005);
Davis, Kubler, and Willen (2005); Yao and Zhang (2005); Horneff, Maurer, and Stamos
(2006); Post, Gründl, and Schmeiser (2006); and Polkovnichenko (2007).