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Behavioral Biases in Annuity Choice: An Experiment

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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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  • Robert S. Gazzale & Lina Walker, 2009. "Behavioral Biases in Annuity Choice: An Experiment," Department of Economics Working Papers 2009-01, Department of Economics, Williams College.
    • Handle: RePEc:wil:wileco:2009-01
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    1. Enrique Fatas & Juan A. Lacomba & Francisco Lagos, 2007. "An Experimental Test On Retirement Decisions," Economic Inquiry, Western Economic Association International, vol. 45(3), pages 602-614, July.
    2. Eytan Sheshinski, 2007. "Introduction to The Economic Theory of Annuities," Introductory Chapters, in: The Economic Theory of Annuities, Princeton University Press.
    3. V. Kerry Smith & Donald H. Taylor & Frank A. Sloan, 2001. "Longevity Expectations and Death: Can People Predict Their Own Demise?," American Economic Review, American Economic Association, vol. 91(4), pages 1126-1134, September.
    4. Milevsky, Moshe A. & Young, Virginia R., 2008. "Erratum to: "Annuitization and asset allocation": [Journal of Economic Dynamics & Control 31 (9) (2007) 3138-3177]," Journal of Economic Dynamics and Control, Elsevier, vol. 32(11), pages 3743-3744, November.
    5. Tversky, Amos & Kahneman, Daniel, 1992. "Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
    6. Eytan Sheshinski, 2007. "The Economic Theory of Annuities," Economics Books, Princeton University Press, edition 1, volume 1, number 8536.
    7. Alicia H. Munnell, 2003. "The Declining Role Of Social Security," Just the Facts jtf-6, Center for Retirement Research.
    8. Amy Finkelstein & Kathleen McGarry, 2006. "Multiple Dimensions of Private Information: Evidence from the Long-Term Care Insurance Market," American Economic Review, American Economic Association, vol. 96(4), pages 938-958, September.
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    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies

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