Cognitive Constraints on Valuing Annuities

Jeffrey Brown, Arie Kapteyn, Erzo Luttmer and Olivia Mitchell

No 19168, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: 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.

JEL-codes: D03 G02 H55 (search for similar items in EconPapers)
Date: 2013-06
New Economics Papers: this item is included in nep-cbe
Note: AG PE
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Citations: View citations in EconPapers (2)

Published as Jeffrey R. Brown & Arie Kapteyn & Erzo F.P. Luttmer & Olivia S. Mitchell, 2017. "Cognitive Constraints on Valuing Annuities," Journal of the European Economic Association, European Economic Association, vol. 15(2), pages 429-462.

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