Here at NFB, I have demonstrated, to my own satisfaction at least, that personal utility theory influences financial planning and (do I dare say it?) SWR analysis.
TRC, I don't quite understand this.
Here at NFB, I have demonstrated, to my own satisfaction at least, that personal utility theory influences financial planning and (do I dare say it?) SWR analysis.
How does all this influence SWR analysis? We frequently agree around here that a retired person may not be willing to continue fixed real annual withdrawals in the face of market declines.
legend has it that the UCL bowling team used Bentham's noggin' for a ball, using either the eye sockets and mouth or mouth and nostrils as the 'holes'... (that's a joke. )
I have this feeling that my utility curve might be somewhat aberrant. I think I might have difficulty withdrawing an inflation increased amount from a declining portfolio.
I'm sure Chips will correct me if I'm wrong, but his 30-dimensional optimization problem would occur even without including utility theory. You just can't tell, year to year, what is going to happen in the future. You can model all you want about the past, as long as you have enough data, and all it will tell you is about the past. You can even model trends. But there is no telling when some brilliant idea is going to hit and change every thing.
Solver's solution has the interesting and unanticipated result that is puts the first two year's withdrawals at zero, then starts with a withdrawal of $84,794.15 in year three, increases gradually to $92,234.57 in year 9, and then declines gradually to $63,795.18 in year 20. This resembles the solution someone might come up with to take advantage of the opportunity for the capital to grow. Then it also recognizes that delayed gratification may be lost because of untimely death so that it makes sense (maybe) to plan on a declining standard of living in the years you are least likely to see.Continuing with the earlier example, and reverting to measuring the utility of money as simply its amount in dollars, the following example includes consideration of life expectancy. Now the planner is concerned only with the withdrawals that he lives to make . . . The data on probability of dying came from Commissioners 1958 Standard Ordinary Mortality Table, for ages 55 to 74, converted from Deaths per 1000.
That may seem extremely odd behaviour to many - I get the impression that most members at NFB lead very well ordered, logical financial lives with spreadsheets etc - am I the only one who has to play psychological tricks on themselves to keep their financial affairs in order????
ataloss wrote: wrt to certitude:
"Doubt is uncomfortable, certainty is ridiculous."
-- Francois Marie Arouet Voltaire