Author: Phil Redding
In this paper Don’t optimise, satisfice! Phil Redding and Stefan Lundburg put forward a way for pension schemes, and other long-term investors, to navigate uncertainty in a complex world. For a Defined Benefit (DB) scheme, transforming the balance sheet problem to an asset-only investment problem means removing unintended investment risks in order to focus on the intended investment risk.Satisficing requires expertise
To achieve ‘true’ diversification, it is suggested that the application of scenario thinking; a dynamic approach as the potential scenarios are path-dependent. The final step is to construct a satisficing investment portfolio, which can reach the goal under a wide range of potential market outcomes. In addition to managing financial risk and operational risks, other risks such as macro longevity risk and regulatory risks remain.
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