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Failures of Contingent Reasoning in Annuitization Decisions

Author

Listed:
  • Erzo F.P. Luttmer
  • Priscila de Oliveira
  • Dmitry Taubinsky

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.

Suggested Citation

  • Erzo F.P. Luttmer & Priscila de Oliveira & Dmitry Taubinsky, 2025. "Failures of Contingent Reasoning in Annuitization Decisions," NBER Working Papers 33654, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:33654
    Note: AG PE
    as

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    More about this item

    JEL classification:

    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving
    • D9 - Microeconomics - - Micro-Based Behavioral Economics
    • G5 - Financial Economics - - Household Finance
    • J26 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Retirement; Retirement Policies

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