Time Inconsistent Preferences and the Annuitization Decision

62 Pages Posted: 2 Feb 2015

See all articles by Philipp Schreiber

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: February 2015

Abstract

When entering retirement most people face the decision whether they would like their defined contribution account balance paid as a lump sum or to annuitize the amount. The fact that people tend to choose the lump sum even if economic reasons suggest not to is called the annuity puzzle. 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. 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.

Keywords: annuities, annuity puzzle, behavioral finance, insurance, longevity risk, survey study

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

Suggested Citation

Schreiber, Philipp and Weber, Martin, Time Inconsistent Preferences and the Annuitization Decision (February 2015). CEPR Discussion Paper No. DP10383, Available at SSRN: https://ssrn.com/abstract=2559324

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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