In this paper we analyze how the traditional life and pension contracts with a guaranteed rate of return can be optimized to increase customers’ welfare. Given that the contracts have to be priced correctly, we use individuals’ preferences to find the preferred design. Assuming CRRA utility, we cannot explain the existence of any form of guarantees. Through numerical solutions we quantify the difference (measured in certainty equivalents) to the preferred Merton solution of direct investments in a fixed proportion of risky and risk free assets. The largest welfare loss seems to come from the fact that guarantees are effective by the end of each year, not only by the expiry of the contract. However, the demand for products with guarantees may be explained through behavioral models. We use cumulative prospect theory as an example, showing that the optimal design is a simple contract with a life-time guarantee and no default option.

We examine the personal investment decisions of 60,000 households following a cancer diagnosis. To create a control group that minimizes the likelihood that the results are confounded by lifestyle factors, we rely on households diagnosed with the same diagnosis but a few years later. Our estimates show that a cancer diagnosis reduces households’ willingness to take risks with their financial wealth. We use the vast heterogeneity among cancers regarding its impact on life expectancy (LE) and income to analyze through which channels cancer impact risk-taking. We find that cancers that have a greater impact on LE and income cause a larger reduction in risk-taking. These two channels account for about 40–90% of the estimated effects of cancer on personal investment decisions. We do not find any association between having dealt with cancer many years ago and current portfolio choices.

Using a novel data set covering all individual investors' stock market transactions in Norway over 10 years, we analyze whether individual investors have a preference for professionally close stocks, and whether they make excess returns on such investments. After excluding own‐company stock holdings, investors hold 11% of their portfolio in stocks within their two‐digit industry of employment. Given the poor hedging properties of such investments, one would expect abnormally high returns. In contrast, all estimates of abnormal returns are negative, in many cases statistically significant. Overconfidence seems the most likely explanation for the excessive trading in professionally close stocks.