Working Paper: NBER ID: w13748
Authors: Jeffrey R. Brown; Jeffrey R. Kling; Sendhil Mullainathan; Marian V. Wrobel
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.
Keywords: annuitization; framing effects; retirement planning; consumer behavior
JEL Codes: G11; H55; J14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| framing of choices (D91) | preference for annuities (D15) |
| consumption frame (E21) | perception of annuities as valuable insurance (G52) |
| investment frame (G31) | perception of annuities as risky assets (G19) |
| framing effect (D91) | likelihood of choosing annuities (G52) |
| framing emphasizing bequest motives (D15) | preference for annuities (D15) |