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Time Inconsistent Preferences and the Annuitization Decision

67 Pages Posted: 15 Feb 2013 Last revised: 10 Sep 2016

Philipp Schreiber

University of Mannheim - Finance Department

Martin Weber

University of Mannheim - Department of Banking and Finance

Multiple version iconThere are 2 versions of this paper

Date Written: June 21, 2016

Abstract

Good news can involve difficult decisions. For example winning a lottery jackpot can go along with the decision, whether to have the jackpot paid out immediately as a lump sum or as periodic annual payments. Also when entering retirement most people face the decision whether they want their defined contribution account balance paid as a lump sum or to annuitize that amount. The fact that people tend to choose the lump sum even if economic reasons suggest that they should choose the annuity is called the annuity paradox. In a large online survey we find that people behave time inconsistent: older people have a stronger tendency to choose the lump sum than younger people when they are asked to predict today what to choose when they retire. This effect is considerably stronger for participants that answer simple time preference questions inconsistently. Our findings suggest to think about precommitment devices for the annuitization decision, in the retirement case, already at the time when the defined benefit plan is started.

Keywords: Annuity Puzzle, annuities, Longevity Risk, insurance, Behavioral Finance, Household Finance, Survey Study

JEL Classification: D14, D91, G02, H55, J14, J26

Suggested Citation

Schreiber, Philipp and Weber, Martin, Time Inconsistent Preferences and the Annuitization Decision (June 21, 2016). Journal of Economic Behavior and Organization, Vol. 129, 2016. Available at SSRN: https://ssrn.com/abstract=2217701 or http://dx.doi.org/10.2139/ssrn.2217701

Philipp Schreiber (Contact Author)

University of Mannheim - Finance Department ( email )

L 9, 1-2
Mannheim, 68131
Germany
+49 621 181 1525 (Phone)
+49 621 181 1534 (Fax)

Martin Weber

University of Mannheim - Department of Banking and Finance ( email )

D-68131 Mannheim
Germany
+49 621 181 1532 (Phone)
+49 621 181 1534 (Fax)

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