From page 184 of "The Missing Billionaires":It is a pretty innocuous looking feature that has profound implications for the user's risk avoidance and utility philosophy and can, as you and I find, dramatically affect the recommended asset allocation. It also warps the qualitative risk calibration on the Risk Tolerance slider.
This technique is not mentioned in Missing Billionaires and I have not run across it in the literature. Ben will have to comment on the history of this idea.
I disagree with Hagani and White on this one. While it’s true that it’s impossible to absolutely guarantee a certain level of spending, that doesn’t mean we shouldn’t make every reasonable effort to ensure it.A common technique in academia is to use a standard utility function, but to "shift" it so that spending the subsistence amount or below is infinitely bad, as spending going to zero would normally be. This generally leads to somewhat smaller optimal sizing than the "kink" method and also tends to be easier to analyze mathematically, hence the popularity. However, because in practice it's typically impossible to absolutely guarantee that spending won't fall below any given level, this technique tends to be problematic when applied to real-world scenarios.
Also, non-discretionary spending is pretty common in the literature. In fact, the popular habit formation utility model is an extension of the concept.
Statistics: Posted by GoWithTheCashFlow — Fri Jan 17, 2025 7:10 pm — Replies 1280 — Views 328515