Behavioral Impediments to Valuing Annuities: Evidence on the Effects of Complexity and Choice Bracketing

Working Paper No. 24101 This paper examines two behavioral factors that diminish people’s ability to value a lifetime income stream or annuity, drawing on a survey of about 4,000 adults in a U.S. nationally representative sample. Our first main finding is that experimentally increasing the complexit...

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Bibliographic Details
Published in:NBER Working Paper Series 2017-12, p.24101
Main Authors: Brown, Jeffrey R, Kapteyn, Arie, Luttmer, Erzo FP, Mitchell, Olivia S, Samek, Anya
Format: Article
Language:English
Subjects:
Consumer behavior
Decision making
Economic theory
Retirement
Variable annuities
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Summary:Working Paper No. 24101 This paper examines two behavioral factors that diminish people’s ability to value a lifetime income stream or annuity, drawing on a survey of about 4,000 adults in a U.S. nationally representative sample. Our first main finding is that experimentally increasing the complexity of the annuity choice reduces respondents’ ability to value the annuity. We measure lack of ability to value an annuity by the difference between the sell and buy values people assign to the annuity. Our second main result is that people’s ability to value an annuity increases when we experimentally induce them to think jointly about the annuitization decision and about the decision of how quickly or slowly to spend down assets in retirement. Accordingly, we conclude that narrow choice bracketing is an impediment to annuitization, yet the impediment can be lessened with a relatively straightforward intervention.
ISSN:0898-2937
DOI:10.3386/w24101