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How suboptimal are linear sharing rules?

Author

Listed:
  • Bjarne Astrup Jensen

    (Copenhagen Business School)

  • Jørgen Aase Nielsen

    (University of Aarhus)

Abstract

The objective of this paper is to analyze criteria for portfolio choice when two investors are forced to invest in a common portfolio and share the proceeds by a linear sharing rule. A similar situation with many investors is typical for defined contribution pension schemes. The restriction implies two sources of suboptimal investment decisions as seen from each of the two investors individually. One is the suboptimal choice of portfolio, the other is the forced linear sharing rule. We measure the combined consequence for each investor by their respective loss in wealth equivalent. We show that significant losses can arise when investors are diverse in their risk attitude. We also show that an investor with a low degree of risk aversion, like the logarithmic or the square root investor, often applied in portfolio choice models, can either inflict or be subject to severe losses when being forced to participate in such a common investment pool.

Suggested Citation

  • Bjarne Astrup Jensen & Jørgen Aase Nielsen, 2016. "How suboptimal are linear sharing rules?," Annals of Finance, Springer, vol. 12(2), pages 221-243, May.
    • Handle: RePEc:kap:annfin:v:12:y:2016:i:2:d:10.1007_s10436-016-0279-3
    DOI: 10.1007/s10436-016-0279-3
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    References listed on IDEAS

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    4. Balter, Anne G. & Schweizer, Nikolaus, 2024. "Robust decisions for heterogeneous agents via certainty equivalents," European Journal of Operational Research, Elsevier, vol. 317(1), pages 171-184.
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    6. Anne G. Balter & Nikolaus Schweizer, 2021. "Robust Decisions for Heterogeneous Agents via Certainty Equivalents," Papers 2106.13059, arXiv.org.
    7. Antje Mahayni & Oliver Lubos & Sascha Offermann, 2021. "Minimum return rate guarantees under default risk: optimal design of quantile guarantees," Review of Managerial Science, Springer, vol. 15(7), pages 1821-1848, October.

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    More about this item

    Keywords

    Constrained portfolio choice; Pareto optimal sharing rules; Suboptimal sharing rules; Linear sharing rules;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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