EconPapers    
Economics at your fingertips  
 

Cumulative prospect theory and deferred annuities

Anran Chen, Steven Haberman and Stephen Thomas

Review of Behavioral Finance, 2019, vol. 11, issue 3, 277-293

Abstract: Purpose - Although it has been proved theoretically that annuities can provide optimal consumption during one’s retirement period, retirees’ reluctance to purchase annuities is a long-standing puzzle. The purpose of this paper is to use behavioral model to analyze the low demand for immediate annuities. Design/methodology/approach - The authors employ cumulative prospect theory (CPT), which contains both loss aversion and probability transformations, to analyze the annuity puzzle. Findings - The authors show that CPT can explain the unattractiveness of immediate annuities. It also shows that retirees would be willing to buy a long-term deferred annuity at retirement. By considering each component from CPT in turn, the loss aversion is found to be the major reason that stops people from buying an annuity while the survival rate transformation is an important factor affecting the decision of when to receive annuity incomes. Originality/value - This paper identifies CPT as one of the reasons for the low demand of immediate annuities. It further suggests that long-term deferred annuities could overcome behavioral obstacles and become popular among retirees.

Keywords: Cumulative prospect theory; Annuity puzzle; Deferred annuities (search for similar items in EconPapers)
Date: 2019
References: Add references at CitEc
Citations: Track citations by RSS feed

Downloads: (external link)
http://www.emeraldinsight.com/10.1108/RBF-10-2017- ... RePEc&WT.mc_id=RePEc (text/html)
Access to full text is restricted to subscribers

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eme:rbfpps:rbf-10-2017-0102

Ordering information: This journal article can be ordered from
Emerald Group Publishing, Howard House, Wagon Lane, Bingley, BD16 1WA, UK
http://emeraldgroupp ... /journals.htm?id=rbf

Access Statistics for this article

Review of Behavioral Finance is currently edited by Phil Holmes and Robert Hudson

More articles in Review of Behavioral Finance from Emerald Group Publishing
Bibliographic data for series maintained by Virginia Chapman ().

 
Page updated 2021-02-23
Handle: RePEc:eme:rbfpps:rbf-10-2017-0102