Behavioral Modeling in Optimal Investment-Consumption Decisions for Long-term Financial Planning

Long-term Financial Planning Abstract: In this paper we develop a modeling framework that incorporates behavioral aspects for an individual planner’s consumption, saving and investment decisions for long-term financial planning. The observed behavioral aspects in preferences, such as, hyperbolic time preference, loss aversion, asymmetric perception of uncertainty, dynamically-shifting reference point, and limited memory are discussed. These behavioral features are incorporated in an optimization framework for the creation of more robust decision-aid systems for long-term financial planning. Some computational results are demonstrated for the tradeoff between immediate consumption and retirement savings. Decision tree models are used for the stochastic evolution of investment returns. keywords: Behavioral preferences, decision trees, long-term financial planning, consumptionsaving tradeoff, decision support system