Default and Naïve Diversification Heuristics in Annuity Choice

40 Pages Posted: 17 Mar 2014 Last revised: 8 Mar 2018

See all articles by Hazel Bateman

Hazel Bateman

UNSW Sydney, CEPAR

Christine Eckert

University of Technology Sydney (UTS) - School of Marketing

Fedor Iskhakov

University of New South Wales (UNSW) - ARC Centre of Excellence in Population Ageing Research (CEPAR)

Jordan J. Louviere

University of South Australia - Institute for Choice

Stephen E. Satchell

University of Cambridge - Faculty of Economics and Politics

Susan Thorp

University of Sydney Business School; Financial Research Network (FIRN); Centre for International Finance and Regulation (CIFR)

Date Written: January 31, 2015

Abstract

Retirement income stream products are difficult for consumers to choose because of their high perceived risk, irreversibility, and high expenditure; little opportunity for social learning; and distant consequences. Yet many countries have shifted more responsibility for these choices to consumers, increasing their likelihood of using suboptimal heuristics without carefully evaluating alternatives. Prior literature is unclear about consumers’ use of heuristics in decumulation decisions or whether sociodemographics can help identify vulnerable consumers. The purpose of this paper is to address some of these gaps by examining choices of life annuities and phased withdrawal products and identifying use of default options and the diversification (1/n or 50:50) heuristic using a novel finite mixture modeling approach. We show that more than 30% of decumulation choices rely on these two heuristics and that cognitive and product knowledge limitations contribute to using such heuristics. The results have implications for public policy on decumulation of retirement savings, regulation of product disclosures, and marketing of annuity and phased withdrawal products. More generally, the model we develop and apply has the potential to provide better understanding of the use of heuristics in consumer decisions.

Keywords: choice heuristics, credence goods, retirement benefits, annuity demand

JEL Classification: M31, C10

Suggested Citation

Bateman, Hazel and Eckert, Christine and Iskhakov, Fedor and Louviere, Jordan J. and Satchell, Stephen E. and Thorp, Susan, Default and Naïve Diversification Heuristics in Annuity Choice (January 31, 2015). UNSW Business School Research Paper No. 2015ACTL09. Available at SSRN: https://ssrn.com/abstract=2409519 or http://dx.doi.org/10.2139/ssrn.2409519

Hazel Bateman

UNSW Sydney, CEPAR ( email )

High Street
Sydney, NSW 2052
Australia

Christine Eckert (Contact Author)

University of Technology Sydney (UTS) - School of Marketing ( email )

P.O. Box 123
Broadway, NSW 2007
Australia

Fedor Iskhakov

University of New South Wales (UNSW) - ARC Centre of Excellence in Population Ageing Research (CEPAR) ( email )

Level 6 Central Lobby (enter via East Lobby)
Australian School of Business Building
Sydney, New South Wales NSW 2052
Australia

Jordan J. Louviere

University of South Australia - Institute for Choice ( email )

Level 13
140 Arthur Street
North Sydney, New South Wales 2060
Australia

Stephen E. Satchell

University of Cambridge - Faculty of Economics and Politics ( email )

Austin Robinson Building
Sidgwick Avenue
Cambridge, CB3 9DD
United Kingdom
44 (0)1223 335213 (Phone)
44 (0)1223 335475 (Fax)

HOME PAGE: http://www.econ.cam.ac.uk/faculty/satchell/index.h

Susan Thorp

University of Sydney Business School ( email )

P.O. Box H58
Sydney, NSW 2006
Australia
+61 2 9351 6354 (Phone)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Centre for International Finance and Regulation (CIFR) ( email )

Level 7, UNSW CBD Campus
1 O'Connell Street
Sydney, NSW 2000
Australia

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