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Why Don't People Insure Late Life Consumption? A Framing Explanation of the Under-Annuitization Puzzle

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  • Mullainathan, Sendhil
  • Brown, Jeffrey R.
  • Kling, Jeffrey R.
  • Wrobel, Marian Vaillant

Abstract

Rational models of risk-averse consumers have difficulty explaining limited annuity demand. We posit that consumers evaluate annuity products using a narrow "investment frame" that focuses on risk and return, rather than a "consumption frame" that considers the consequences for lifelong consumption. Under an investment frame, annuities are quite unattractive, exhibiting high risk without high returns. Survey evidence supports this hypothesis: whereas 72 percent of respondents prefer a life annuity over a savings account when the choice is framed in terms of consumption, only 21 percent of respondents prefer it when the choice is framed in terms of investment features.

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Bibliographic Info

Paper provided by Harvard University Department of Economics in its series Scholarly Articles with number 2799056.

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Date of creation: 2008
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Publication status: Published in American Economic Review
Handle: RePEc:hrv:faseco:2799056

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  1. Read, Daniel & Loewenstein, George & Rabin, Matthew, 1999. "Choice Bracketing," Journal of Risk and Uncertainty, Springer, vol. 19(1-3), pages 171-97, December.
  2. Richard H. Thaler, 2008. "Mental Accounting and Consumer Choice," Marketing Science, INFORMS, vol. 27(1), pages 15-25, 01-02.
  3. Jeffrey R. Brown, 2007. "Rational and Behavioral Perspectives on the Role of Annuities in Retirement Planning," NBER Working Papers 13537, National Bureau of Economic Research, Inc.
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  1. Why are retirees not buying annuities?
    by Economic Logician in Economic Logic on 2008-08-05 15:14:00
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