Why Don't People Insure Late Life Consumption: A Framing Explanation of the Under-Annuitization Puzzle
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.
We thank Abby Bookman and Garth Wiens for exceptional research assistance. We are grateful to the Pew Charitable Trusts and the TIAA-CREF Research Institute for financial support; Kling also thanks the MacArthur and Mott Foundations for support. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research, the Pew Charitable Trusts, the TIAA-CREF Institute, the MacArthur Foundation or the Mott Foundation
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 304-09, May. citation courtesy of