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Why Don’t People Insure Late-Life Consumption? A Framing Explanation of the Under-Annuitization Puzzle

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Listed:
  • 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.
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Suggested Citation

  • Jeffrey R. Brown & Jeffrey R. Kling & Sendhil Mullainathan & Marian V. Wrobel, 2008. "Why Don’t People Insure Late-Life Consumption? A Framing Explanation of the Under-Annuitization Puzzle," American Economic Review, American Economic Association, vol. 98(2), pages 304-309, May.
    • Handle: RePEc:aea:aecrev:v:98:y:2008:i:2:p:304-09
    Note: DOI: 10.1257/aer.98.2.304
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    1. Jeffrey R. Brown & Jeffrey R. Kling & Sendhil Mullainathan & Marian V. Wrobel, 2008. "Why Don’t People Insure Late-Life Consumption? A Framing Explanation of the Under-Annuitization Puzzle," American Economic Review, American Economic Association, vol. 98(2), pages 304-309, May.
    2. Richard H. Thaler, 2008. "Mental Accounting and Consumer Choice," Marketing Science, INFORMS, vol. 27(1), pages 15-25, 01-02.
    3. Read, Daniel & Loewenstein, George & Rabin, Matthew, 1999. "Choice Bracketing," Journal of Risk and Uncertainty, Springer, vol. 19(1-3), pages 171-197, December.
    4. Robert B. Barsky & F. Thomas Juster & Miles S. Kimball & Matthew D. Shapiro, 1997. "Preference Parameters and Behavioral Heterogeneity: An Experimental Approach in the Health and Retirement Study," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 112(2), pages 537-579.
    5. Jeffrey R. Brown, 2007. "Rational and Behavioral Perspectives on the Role of Annuities in Retirement Planning," NBER Working Papers 13537, National Bureau of Economic Research, Inc.
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    More about this item

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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