Behavioral Obstacles in the Annuity Market

Posted: 14 Dec 2007

See all articles by Wei-Yin Hu

Wei-Yin Hu

Financial Engines, Inc.

Jason S. Scott

Financial Engines, Inc.

Abstract

As Baby Boomers enter retirement, they will look to the investment industry for ways to generate income from accumulated savings. Why most retirees do not purchase longevity insurance in the form of lifetime annuities is a long-standing puzzle. Mental accounting and loss aversion can explain the unpopularity of annuities by framing them as risky gambles where potential losses loom larger than potential gains. Moreover, behavioral anomalies can explain the prevalence of period certain annuities, which guarantee a minimum number of payouts. Finally, investors may prefer longevity annuities purchased today to begin payouts in the future to immediate annuities because investors overweight the small probability of living long enough to receive large future payouts.

Keywords: Private Wealth Management: Client Objectives, Constraints, and Behavior, Asset Allocation

Suggested Citation

Hu, Wei-Yin and Scott, Jason S., Behavioral Obstacles in the Annuity Market. Financial Analysts Journal, Vol. 63, No. 6, 2007. Available at SSRN: https://ssrn.com/abstract=1071149

Wei-Yin Hu (Contact Author)

Financial Engines, Inc. ( email )

1050 Enterprise Way, 3rd Floor
Sunnyvale, CA 94089
United States

Jason S. Scott

Financial Engines, Inc. ( email )

1050 Enterprise Way, 3rd Floor
Sunnyvale, CA 94089
United States

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