Failures of Contingent Reasoning in Annuitization Decisions

Erzo Luttmer, Priscila de Oliveira and Dmitry Taubinsky

No 33654, NBER Working Papers from National Bureau of Economic Research, Inc

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 under-appreciated 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: D14 D15 D9 G5 J26 (search for similar items in EconPapers)
Date: 2025-04
New Economics Papers: this item is included in nep-age and nep-exp
Note: AG PE
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Published as Erzo F.P. Luttmer & Priscila De Oliveira & Dmitry Taubinsky, 2026. "Failures of Contingent Reasoning in Annuitization Decisions," American Economic Journal: Microeconomics, vol 18(3), pages 454-480.

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