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Behavioral Impediments to Valuing Annuities: Complexity and Choice Bracketing

Author

Listed:
  • Jeffrey R. Brown

    (University of Illinois and NBER)

  • Arie Kapteyn

    (University of Southern California and NBER)

  • Erzo F. P. Luttmer

    (Dartmouth College and NBER)

  • Olivia S. Mitchell

    (University of Pennsylvania and NBER)

  • Anya Samek

    (University of California, San Diego and NBER)

Abstract

This paper examines two behavioral factors that diminish people's ability to value a lifetime income stream or annuity, drawing on a randomized experiment with about 4,000 adults in a U.S. nationally representative sample. We find that increasing the complexity of the annuity choice reduces respondents' ability to value the annuity, measured by the difference between the sell and buy values they assign to the annuity. When we limit narrow choice bracketing by inducing people to think first about how quickly or slowly to spend down assets in retirement, their ability to value an annuity increases.

Suggested Citation

  • Jeffrey R. Brown & Arie Kapteyn & Erzo F. P. Luttmer & Olivia S. Mitchell & Anya Samek, 2021. "Behavioral Impediments to Valuing Annuities: Complexity and Choice Bracketing," The Review of Economics and Statistics, MIT Press, vol. 103(3), pages 533-546, July.
    • Handle: RePEc:tpr:restat:v:103:y:2021:i:3:p:533-546
    DOI: 10.1162/rest_a_00892
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    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions

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