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Failures of Contingent Reasoning in Annuitization Decisions

Author

Listed:
  • Erzo F.P. Luttmer
  • Priscila De Oliveira
  • Dmitry Taubinsky

Abstract

This paper studies psychological biases in take-up of annuities, using an incentivized experiment with a probability-based sample (N = 3,038). Choosing an annuity was payoff-maximizing in the experiment at all prices, but take-up was incomplete and price elastic. Reformulating decisions as insurance against a "bad" outcome rather than insurance against "longevity risk" did not increase take-up. Instead, we find substantial failures of contingent reasoning: Participants underappreciated how annuitization mitigated the need for less-efficient means of saving for retirement. Increasing the salience of the interaction with savings decisions, or eliminating the need to think through this interaction altogether, substantially increased annuity take-up.

Suggested Citation

  • Erzo F.P. Luttmer & Priscila De Oliveira & Dmitry Taubinsky, 2026. "Failures of Contingent Reasoning in Annuitization Decisions," American Economic Journal: Microeconomics, American Economic Association, vol. 18(3), pages 454-480, August.
    • Handle: RePEc:aea:aejmic:v:18:y:2026:i:3:p:454-80
    DOI: 10.1257/mic.20240184
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    More about this item

    JEL classification:

    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G51 - Financial Economics - - Household Finance - - - Household Savings, Borrowing, Debt, and Wealth
    • G52 - Financial Economics - - Household Finance - - - Insurance
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies

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