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

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Author Info
Jeffrey R. Brown
Jeffrey R. Kling
Sendhil Mullainathan
Marian V. Wrobel

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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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13748.

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Date of creation: Jan 2008
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Handle: RePEc:nbr:nberwo:13748

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Find related papers by JEL classification:
G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
J14 - Labor and Demographic Economics - - Demographic Economics - - - Economics of the Elderly; Economics of the Handicapped

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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. [Downloadable!] (restricted)
  2. 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. [Downloadable!] (restricted)
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  1. Monika Bütler & Stefan Staubli & Maria Grazia Zito, 2008. "The Role of the Annuity’s Value on the Decision (Not) to Annuitize: Evidence from a Large Policy Change," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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