Cognitive Constraints on Valuing Annuities

Jeffrey R Brown, Arie Kapteyn, Erzo F.P. Luttmer, Olivia S Mitchell

Research output: Working paper

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.
Original languageUndefined
PublisherWiley-Blackwell
Pages429-462
Volume15
DOIs
Publication statusPublished - Jun 1 2013

Publication series

NameJournal of the European Economic Association
PublisherWiley-Blackwell
ISSN (Print)1542-4774

Keywords

  • annuity
  • retirement income
  • Social Security
  • financial literacy
  • cognition

Cite this

Brown, J. R., Kapteyn, A., Luttmer, E. F. P., & Mitchell, O. S. (2013). Cognitive Constraints on Valuing Annuities. (2 ed.) (pp. 429-462). (Journal of the European Economic Association). Wiley-Blackwell. https://doi.org/10.3386/w19168