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

  • Jeffrey R. Brown
  • Jeffrey R. Kling
  • Sendhil Mullainathan
  • Marian V. Wrobel

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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File URL: http://www.nber.org/papers/w13748.pdf
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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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Publication status: published as Jeffrey R. Brown & Jeffrey R. Kling & Sendhil Mullainathan & Marian V. Wrobel, 2008. "Why Don’t People Insure Late-Life Consumption? A Framing Explanation of the Under-Annuitization Puzzle," American Economic Review, American Economic Association, vol. 98(2), pages 304-09, May.
Handle: RePEc:nbr:nberwo:13748
Note: AG PE
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  1. Richard Thaler, 1985. "Mental Accounting and Consumer Choice," Marketing Science, INFORMS, vol. 4(3), pages 199-214.
  2. Mullainathan, Sendhil & Brown, Jeffrey R. & Kling, Jeffrey R. & Wrobel, Marian Vaillant, 2008. "Why Don't People Insure Late Life Consumption? A Framing Explanation of the Under-Annuitization Puzzle," Scholarly Articles 2799056, Harvard University Department of Economics.
  3. 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.
  4. Read, Daniel & Loewenstein, George & Rabin, Matthew, 1999. "Choice Bracketing," Journal of Risk and Uncertainty, Springer, vol. 19(1-3), pages 171-97, December.
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