Building a distribution builder Design considerations for financial investment and pension decisions
Recent research suggests that advice and communication about investment risks can be improved by use of the Distribution Builder (Goldstein, Johnson, and Sharpe 2008). Essentially, this is an interactive tool that allows consumers to engage in a hypothetical investment task and to experience risk-return tradeoffs.
The objective of this paper is to provide an overview of design considerations when developing a Distribution Builder that is intended to measure two main characteristics of the risk profile of consumers: the utility function (how outcomes are valued by consumers) and the probability weighting function (the extent to which consumer perceptions of probabilities are biased). We focus on the domain of financial investments, in particular those related to pension funds.