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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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  • 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. Alicia H. Munnell, 2003. "The Declining Role Of Social Security," Just the Facts jtf-6, Center for Retirement Research.
    7. Milevsky, Moshe A. & Young, Virginia R., 2007. "Annuitization and asset allocation," Journal of Economic Dynamics and Control, Elsevier, vol. 31(9), pages 3138-3177, September.
    8. Eytan Sheshinski, 2007. "The Economic Theory of Annuities," Economics Books, Princeton University Press, edition 1, volume 1, number 8536.
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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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