An Investigation of Time Preferences, Life Expectancy, and Annuity Versus Lump Sum Choices: Can Smoking Harm Long-Term Saving Decisions?

Posted: 12 Jan 2021

See all articles by Abigail Hurwitz

Abigail Hurwitz

Hebrew University, Jerusalem Israel

Orly Sade

Hebrew University of Jerusalem - Department of Finance

Multiple version iconThere are 2 versions of this paper

Date Written: December 2020

Abstract

We exploit the fact that Israeli pension insurance policies do not take health conditions or smoking status into account in annuity pricing to investigate the potential effect of being a smoker on retirement payout choices. Contrary to the idea that smokers have higher discount rates (and thus should prefer the lump sum option), and even though the insurance pricing mechanism means that smokers would be offered the same annuity as nonsmokers (all else equal), we find that smokers do not prefer the lump sum option. We offer and test several potential explanations for our findings: illusions regarding life expectancy, self-control, and advantageous selection.

Keywords: Smoking, Financial decision, Time preference, Longevity insurance

JEL Classification: D9, G41, I1, J320

Suggested Citation

Hurwitz, Abigail and Sade, Orly, An Investigation of Time Preferences, Life Expectancy, and Annuity Versus Lump Sum Choices: Can Smoking Harm Long-Term Saving Decisions? (December 2020). Journal of Economic Behavior and Organization, Vol. 180, 2020, Available at SSRN: https://ssrn.com/abstract=3745591

Abigail Hurwitz

Hebrew University, Jerusalem Israel ( email )

Mount Scopus
Jerusalem, 91905
Israel

Orly Sade (Contact Author)

Hebrew University of Jerusalem - Department of Finance ( email )

Mount Scopus
Jerusalem, 91905
Israel
972 2 588 3227 (Phone)

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