American Economic Journal:
Microeconomics
ISSN 1945-7669 (Print) | ISSN 1945-7685 (Online)
Failures of Contingent Reasoning in Annuitization Decisions
American Economic Journal: Microeconomics
(pp. 454–80)
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 underappreciated 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.Citation
Luttmer, Erzo F.P. ⓡ Priscila De Oliveira ⓡ Dmitry Taubinsky. 2026. "Failures of Contingent Reasoning in Annuitization Decisions." American Economic Journal: Microeconomics 18 (3): 454–80. DOI: 10.1257/mic.20240184Additional Materials
JEL Classification
- D15 Intertemporal Household Choice; Life Cycle Models and Saving
- G22 Insurance; Insurance Companies; Actuarial Studies
- G23 Pension Funds; Non-bank Financial Institutions; Financial Instruments; Institutional Investors
- G51 Household Finance: Household Saving, Borrowing, Debt, and Wealth
- G52 Household Finance: Insurance
- J26 Retirement; Retirement Policies