Why Don't People Insure Late Life Consumption: A Framing Explanation of the Under-Annuitization Puzzle

17 Pages Posted: 24 Jan 2008 Last revised: 27 Jul 2010

See all articles by Jeffrey R. Brown

Jeffrey R. Brown

University of Illinois at Urbana-Champaign - Department of Finance; National Bureau of Economic Research (NBER); University of Illinois College of Law; University of Illinois at Urbana-Champaign - Institute of Government and Public Affairs (IGPA); University of Illinois at Urbana-Champaign - Department of Economics

Jeffrey R. Kling

Government of the United States of America - Congressional Budget Office (CBO); National Bureau of Economic Research (NBER)

Sendhil Mullainathan

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Marian Wrobel

Harvard University - Institute for Quantitative Social Science

Date Written: January 2008

Abstract

Rational models of risk-averse consumers have difficulty explaining limited annuity demand. We posit that consumers evaluate annuity products using a narrow "investment frame" that focuses on risk and return, rather than a "consumption frame" that considers the consequences for lifelong consumption. Under an investment frame, annuities are quite unattractive, exhibiting high risk without high returns. Survey evidence supports this hypothesis: whereas 72 percent of respondents prefer a life annuity over a savings account when the choice is framed in terms of consumption, only 21 percent of respondents prefer it when the choice is framed in terms of investment features.

Suggested Citation

Brown, Jeffrey R. and Kling, Jeffrey and Mullainathan, Sendhil and Wrobel, Marian, Why Don't People Insure Late Life Consumption: A Framing Explanation of the Under-Annuitization Puzzle (January 2008). NBER Working Paper No. w13748. Available at SSRN: https://ssrn.com/abstract=1086999

Jeffrey R. Brown (Contact Author)

University of Illinois at Urbana-Champaign - Department of Finance ( email )

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National Bureau of Economic Research (NBER) ( email )

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University of Illinois College of Law ( email )

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University of Illinois at Urbana-Champaign - Department of Economics ( email )

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Jeffrey Kling

Government of the United States of America - Congressional Budget Office (CBO) ( email )

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National Bureau of Economic Research (NBER)

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Sendhil Mullainathan

Harvard University - Department of Economics ( email )

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National Bureau of Economic Research (NBER) ( email )

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Marian Wrobel

Harvard University - Institute for Quantitative Social Science ( email )

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Cambridge, MA 02138
United States

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