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
Date Written: January 2008
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.
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