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Behavioral Biases in Annuity Choice: An Experiment

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Abstract

We conduct a neutral-context laboratory experiment to systematically investigate the role of the hit-by-bus concern in explaining the annuitization puzzle: the low rate of retirement-asset annuitization relative to the predictions of standard models. We vary endowed asset (annuity vs. stock of wealth vs. no explicit endowment), and find a strong endowment effect. Furthermore, we find that the ordering of survival risks matters. Compared to a frame in which a single draw from a known distribution determines survival outcome, annuity choice is lower when subjects must sequentially survive early periods to reach periods in which the annuity dominates. We conclude with policy implications.

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File URL: http://web.williams.edu/Economics/wp/gazzaleAnnuityChoice20090325.pdf
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Bibliographic Info

Paper provided by Department of Economics, Williams College in its series Department of Economics Working Papers with number 2009-01.

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Length: 37 pages
Date of creation: Mar 2009
Date of revision:
Handle: RePEc:wil:wileco:2009-01

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Keywords: experimental economics; behavioral; retirement; annuities;

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Cited by:
  1. Enrique Fatás & Juan Lacomba & Francisco Lagos & Ana Moro-Egido, 2013. "An experimental test on dynamic consumption and lump-sum pensions," SERIEs, Spanish Economic Association, vol. 4(4), pages 393-413, November.

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