Behavioral Impediments to Valuing Annuities: Complexity and Choice Bracketing

61 Pages Posted: 8 Apr 2019 Last revised: 25 Feb 2020

See all articles by Jeffrey R. Brown

Jeffrey R. Brown

University of Illinois at Urbana-Champaign - Department of Finance; National Bureau of Economic Research (NBER); University of Illinois College of Law; University of Illinois at Urbana-Champaign - Institute of Government and Public Affairs (IGPA); University of Illinois at Urbana-Champaign - Department of Economics

Arie Kapteyn

Dornsife Center for Economic and Social Research - University of Southern California; IZA Institute of Labor Economics

Erzo F. P. Luttmer

Dartmouth College; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

Olivia S. Mitchell

University of Pennsylvania - The Wharton School; University of Pennsylvania - The Wharton School, Pension Research Council; National Bureau of Economic Research (NBER)

Anya Samek

Center for Economic and Social Research (CESR); University of Southern California - Department of Economics

Multiple version iconThere are 2 versions of this paper

Date Written: December 13, 2019

Abstract

This paper examines two behavioral factors that diminish people’s ability to value a lifetime income stream or annuity, drawing on a survey of about 4,000 adults in a U.S. nationally representative sample. By experimentally varying the degree of complexity, we provide the first causal evidence that increasing the complexity of the annuity choice reduces respondents’ ability to value the annuity, measured by the difference between the sell and buy values people assign to the annuity. We also find that people’s ability to value an annuity increases when we experimentally induce them to think jointly about the annuitization decision as well as how quickly or slowly to spend down assets in retirement. Accordingly, we conclude that narrow choice bracketing is an impediment to annuitization, yet this impediment can be mitigated with a relatively straightforward intervention.

Keywords: pension, annuity, retirement income, Social Security, cognition, behavioral economics

JEL Classification: D14, D91, G11, H55

Suggested Citation

Brown, Jeffrey R. and Kapteyn, Arie and Luttmer, Erzo F.P. and Mitchell, Olivia S. and Samek, Anya, Behavioral Impediments to Valuing Annuities: Complexity and Choice Bracketing (December 13, 2019). Wharton Pension Research Council Working Paper No. 2019-05. Available at SSRN: https://ssrn.com/abstract=3354845 or http://dx.doi.org/10.2139/ssrn.3354845

Jeffrey R. Brown (Contact Author)

University of Illinois at Urbana-Champaign - Department of Finance ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

University of Illinois College of Law ( email )

504 E. Pennsylvania Avenue
Champaign, IL 61820
United States

University of Illinois at Urbana-Champaign - Institute of Government and Public Affairs (IGPA) ( email )

Urbana, IL 61801
United States

University of Illinois at Urbana-Champaign - Department of Economics ( email )

410 David Kinley Hall
1407 W. Gregory
Urbana, IL 61801
United States

Arie Kapteyn

Dornsife Center for Economic and Social Research - University of Southern California ( email )

635 Downey Way
Los Angeles, CA 90089-3332
United States
310-448-5383 (Phone)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Erzo F.P. Luttmer

Dartmouth College ( email )

Department of Economics
Hanover, NH 03755
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Olivia S. Mitchell

University of Pennsylvania - The Wharton School ( email )

Philadelphia, PA 19104-6365
United States

University of Pennsylvania - The Wharton School, Pension Research Council ( email )

3302 Steinberg Hall-Dietrich Hall
3620 Locust Walk
Philadelphia, PA 19104-6302
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Anya Samek

Center for Economic and Social Research (CESR) ( email )

635 Downey Way
Los Angeles, CA 90089-3332
United States

University of Southern California - Department of Economics ( email )

3620 South Vermont Ave. Kaprielian (KAP) Hall, 300
Los Angeles, CA 90089
United States

Here is the Coronavirus
related research on SSRN

Paper statistics

Downloads
28
Abstract Views
272
PlumX Metrics