The Distribution Builder: A Tool for Inferring Investor Preferences

This paper describes the Distribution Builder, an interactive tool that can elicit information about an investor's preferences. Such information can, in turn, be used when making decisions about investment alternatives over time for that investor. The approach can also be employed when conducting surveys designed to obtain data on the crosssection of investor preferences. Hopefully, such data can provide insights that can lead to more realistic models of equilibrium in capital markets. The approach asks an investor to choose among alternative probability distributions for end-of-period wealth, where only distributions with similar overall costs are allowed. Importantly, the cost of any distribution is consistent with a model of equilibrium pricing in capital markets. We show how such a model can be calibrated and how information about an investor's marginal utility of wealth can be inferred from his or her choice of a distribution.