Decision Complexity as a Barrier to Annuitization
AbstractWe show that people have difficulty valuing annuities, and this, instead of a preference for lumpsums, helps explain observed low annuity demand. Although the median price at which people are willing to sell an annuity stream is close to the actuarial value, many responses diverge greatly from optimizing behavior. Moreover, people will pay substantially less to buy than to sell annuities. We conclude that boundedly rational consumers adopt “buy low, sell high” heuristics when confronting a complex trade-off. This suggests that many consumers do not make optimizing decisions, underscoring the difficulty of explaining cross-sectional annuity valuation differences using standard models.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 19168.
Date of creation: Jun 2013
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Note: AG PE
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Find related papers by JEL classification:
- D03 - Microeconomics - - General - - - Behavioral Microeconomics; Underlying Principles
- G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
- H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
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