NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Cognitive Constraints on Valuing Annuities

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

NBER Working Paper No. 19168
Issued in June 2013, Revised in October 2014
NBER Program(s):Aging, Public Economics

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.

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Document Object Identifier (DOI): 10.3386/w19168

Published: Jeffrey R. Brown & Arie Kapteyn & Erzo F.P. Luttmer & Olivia S. Mitchell, 2017. "Cognitive Constraints on Valuing Annuities," Journal of the European Economic Association, European Economic Association, vol. 15(2), pages 429-462. citation courtesy of

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