Behavioral Impediments to Valuing Annuities: Complexity and Choice Bracketing

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IZA Seminar

Place: Schaumburg-Lippe-Str. 9, 53113 Bonn

Date: 10.12.2019, 12:00 - 13:30

   

Presentation by 

Erzo F.P. Luttmer (Dartmouth College)
   

Abstract:

This paper examines two behavioral factors that diminish people’s ability to value a
lifetime income stream or annuity, drawing on a survey of about 4,000 adults in a
U.S. nationally representative sample. By experimentally varying the degree of
complexity, we provide the first causal evidence 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 people assign to the annuity. We also find
that people’s ability to value an annuity increases when we experimentally induce
them to think jointly about the annuitization decision as well as how quickly or slowly
to spend down assets in retirement. Accordingly, we conclude that narrow choice
bracketing is an impediment to annuitization, yet this impediment can be mitigated
with a relatively straightforward intervention.

   
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