Cognitive Constraints on Valuing Annuities / Jeffrey R. Brown, Arie Kapteyn, Erzo F.P. Luttmer, Olivia S. Mitchell.

Format:

Book

Author/Creator:

Brown, Jeffrey R.

Contributor:

National Bureau of Economic Research.

Kapteyn, Arie.

Luttmer, Erzo F.P.

Mitchell, Olivia S.

Series:

Working Paper Series (National Bureau of Economic Research) no. w19168.

NBER working paper series no. w19168

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2013.

Summary:

We show that people have difficulty valuing annuities, and this, instead of a preference for lumpsums, helps explain observed low annuity demand. Although the median price at which people are willing to sell an annuity stream is close to the actuarial value, many responses diverge greatly from optimizing behavior. Moreover, people will pay substantially less to buy than to sell annuities. We conclude that boundedly rational consumers adopt "buy low, sell high" heuristics when confronting a complex trade-off. This suggests that many consumers do not make optimizing decisions, underscoring the difficulty of explaining cross-sectional annuity valuation differences using standard models.

Notes:

Print version record

June 2013.