The Empirical Frame of the Decision to Annuitize

36 Pages Posted: 23 Nov 2016

See all articles by Moritz Lehmensiek-Starke

Moritz Lehmensiek-Starke

University of Muenster

Sven Nolte

University of Muenster - Finance Center Muenster; California Institute of Technology - Economics

Date Written: May 22, 2016

Abstract

Microeconomic theory suggests that annuities are favorable because they ensure a steady path of consumption no matter how long the annuitant will live. As a promising attempt to explain why actual annuitization rates are lower than expected, it has recently been argued that consumers do not use such a consumption frame when they decide on annuitizing their wealth. Instead, they might rather apply an investment frame: They evaluate the annuity as a standalone financial product, focusing mainly on its risk and return characteristics and thereby ignoring its insurance value. In this paper, we propose a novel approach to empirically test which frame is actually used by consumers. More precisely, we argue that uncertainty about one’s subjective prospects of survival should have opposing effects on the decision to annuitize depending on the frame. In a consumption frame, an annuity provides a hedge against the financial risks of an uncertain lifetime whereas in an investment frame uncertainty about one’s future survival translates directly into financial risk. Using field data from the Health and Retirement Study, we show that respondents who have more precise beliefs about their chances of survival tend to annuitize larger parts of their wealth. We therefore find empirical support for the investment frame.

Keywords: Framing, Uncertainty, Annuity Puzzle, Modal Choice

JEL Classification: D12, D14, D81, G11, H55, J14

Suggested Citation

Lehmensiek-Starke, Moritz and Nolte, Sven, The Empirical Frame of the Decision to Annuitize (May 22, 2016). Available at SSRN: https://ssrn.com/abstract=2874241 or http://dx.doi.org/10.2139/ssrn.2874241

Moritz Lehmensiek-Starke

University of Muenster ( email )

Schlossplatz 2
Muenster, D-48149
Germany

Sven Nolte (Contact Author)

University of Muenster - Finance Center Muenster ( email )

Universitatsstr. 14-16
Muenster, 48143
Germany

California Institute of Technology - Economics ( email )

United States

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