Failures of Contingent Reasoning in Annuitization Decisions

Erzo F.P. Luttmer, Priscila De Oliveira and Dmitry Taubinsky

American Economic Journal: Microeconomics, 2026, vol. 18, issue 3, 454-80

Abstract: This paper studies psychological biases in take-up of annuities, using an incentivized experiment with a probability-based sample (N = 3,038). Choosing an annuity was payoff-maximizing in the experiment at all prices, but take-up was incomplete and price elastic. Reformulating decisions as insurance against a "bad" outcome rather than insurance against "longevity risk" did not increase take-up. Instead, we find substantial failures of contingent reasoning: Participants underappreciated how annuitization mitigated the need for less-efficient means of saving for retirement. Increasing the salience of the interaction with savings decisions, or eliminating the need to think through this interaction altogether, substantially increased annuity take-up.

JEL-codes: D15 G22 G23 G51 G52 J26 (search for similar items in EconPapers)
Date: 2026
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DOI: 10.1257/mic.20240184

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