Reading 11: Investment Decision Making in Defined Contribut

Mudd should disagree with both statements. Individual investors do not always exhibit purely selfish investment motives. A term you may see on the exam is boundedly selfish, meaning individuals do not always make decisions that are in their own best interest. One of the factors that limits the ability of defined contribution plan investors is simply lethargy. Even when individuals understand investing concepts, they tend to lack the self-discipline to follow through or monitor their investment plans.

Characteristics 1 and 3 are definitely reflective of participants in defined contribution plans, but Characteristic 2 is not. DC plan investors tend to think about retirement itself (spending days on the beach) but do not think at all about dollar amounts and return requirements. This is a significant factor that limits the ability of defined contribution plan investors to successfully manage their investments.

One of the factors that may limit the ability of DC plan participants to successfully manage their investments is the fact that participants tend to think about retirement itself (spending days on the beach) but do think at all about dollar amounts and return requirements that they will need to get to retirement. The other answer choices listed are not reflective of typical individual investors in retirement plans. Perhaps the biggest impediment for DC plan participants is lack of understanding of investment concepts. Most do not understand the concept of correlation and how to properly diversify a portfolio, nor do they understand the concepts of investing styles such as growth or value investing. Plan participants are also characterized by lethargy if they view investing as too complex to understand, they are most likely to throw some investments together and let it sit if they do anything at all. Even if participants do understand investing concepts, many lack the self-discipline to follow through or monitor their plans.