Working Paper: NBER ID: w24101
Authors: Jeffrey R. Brown; Arie Kapteyn; Erzo FP Luttmer; Olivia S. Mitchell; Anya Samek
Abstract: This paper examines two behavioral factors that diminish people’s ability to value a lifetime income stream or annuity, drawing on a survey of about 4,000 adults in a U.S. nationally representative sample. By experimentally varying the degree of complexity, we provide the first causal evidence that increasing the complexity of the annuity choice reduces respondents’ ability to value the annuity, measured by the difference between the sell and buy values people assign to the annuity. We also find that people’s ability to value an annuity increases when we experimentally induce them to think jointly about the annuitization decision as well as how quickly or slowly to spend down assets in retirement. Accordingly, we conclude that narrow choice bracketing is an impediment to annuitization, yet this impediment can be mitigated with a relatively straightforward intervention.
Keywords: annuities; behavioral economics; decision making; complexity; choice bracketing
JEL Codes: D14; D91; G11; H55
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Narrow choice bracketing (D01) | Impedes rational valuation of annuities (G19) |
| Deliberate framing interventions (D91) | Mitigate narrow choice bracketing (D91) |
| Increasing complexity of the annuity choice (D15) | Increase in sell-buy spread (G19) |
| Complexity of the vignette (C59) | Increasing complexity of the annuity choice (D15) |
| Consequence message intervention (F51) | Decrease in sell-buy spread (G19) |
| Broader thinking about asset decumulation (D14) | Better assessment of annuity value (G52) |