IDEAS home Printed from https://ideas.repec.org/a/eme/rbfpps/rbf-10-2017-0102.html
   My bibliography  Save this article

Cumulative prospect theory and deferred annuities

Author

Listed:
  • Anran Chen
  • Steven Haberman
  • Stephen Thomas

Abstract

Purpose - Although it has been proved theoretically that annuities can provide optimal consumption during one’s retirement period, retirees’ reluctance to purchase annuities is a long-standing puzzle. The purpose of this paper is to use behavioral model to analyze the low demand for immediate annuities. Design/methodology/approach - The authors employ cumulative prospect theory (CPT), which contains both loss aversion and probability transformations, to analyze the annuity puzzle. Findings - The authors show that CPT can explain the unattractiveness of immediate annuities. It also shows that retirees would be willing to buy a long-term deferred annuity at retirement. By considering each component from CPT in turn, the loss aversion is found to be the major reason that stops people from buying an annuity while the survival rate transformation is an important factor affecting the decision of when to receive annuity incomes. Originality/value - This paper identifies CPT as one of the reasons for the low demand of immediate annuities. It further suggests that long-term deferred annuities could overcome behavioral obstacles and become popular among retirees.

Suggested Citation

  • Anran Chen & Steven Haberman & Stephen Thomas, 2019. "Cumulative prospect theory and deferred annuities," Review of Behavioral Finance, Emerald Group Publishing Limited, vol. 11(3), pages 277-293, June.
    • Handle: RePEc:eme:rbfpps:rbf-10-2017-0102
    DOI: 10.1108/RBF-10-2017-0102
    as

    Download full text from publisher

    File URL: https://www.emerald.com/insight/content/doi/10.1108/RBF-10-2017-0102/full/html?utm_source=repec&utm_medium=feed&utm_campaign=repec
    Download Restriction: Access to full text is restricted to subscribers
    File URL: https://www.emerald.com/insight/content/doi/10.1108/RBF-10-2017-0102/full/pdf?utm_source=repec&utm_medium=feed&utm_campaign=repec
    Download Restriction: Access to full text is restricted to subscribers
    File URL: https://libkey.io/10.1108/RBF-10-2017-0102?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Butt, Adam & Khemka, Gaurav & Warren, Geoffrey J., 2022. "Heterogeneity in optimal investment and drawdown strategies in retirement," Pacific-Basin Finance Journal, Elsevier, vol. 74(C).

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eme:rbfpps:rbf-10-2017-0102. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Emerald Support (email available below). General contact details of provider: .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.