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Why Don't People Insure Late Life Consumption: A Framing Explanation of the Under-Annuitization Puzzle

Jeffrey Brown (), Jeffrey Kling, Sendhil Mullainathan () and Marian V. Wrobel

No 13748, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Rational models of risk-averse consumers have difficulty explaining limited annuity demand. We posit that consumers evaluate annuity products using a narrow "investment frame" that focuses on risk and return, rather than a "consumption frame" that considers the consequences for lifelong consumption. Under an investment frame, annuities are quite unattractive, exhibiting high risk without high returns. Survey evidence supports this hypothesis: whereas 72 percent of respondents prefer a life annuity over a savings account when the choice is framed in terms of consumption, only 21 percent of respondents prefer it when the choice is framed in terms of investment features.

JEL-codes: G11 H55 J14 (search for similar items in EconPapers)
Date: 2008-01
Note: AG PE
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Published as Jeffrey R. Brown & Jeffrey R. Kling & Sendhil Mullainathan & Marian V. Wrobel, 2008. "Why Don’t People Insure Late-Life Consumption? A Framing Explanation of the Under-Annuitization Puzzle," American Economic Review, American Economic Association, vol. 98(2), pages 304-09, May.

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