Behavioral Biases in Annuity Choice: An Experiment

Williams College Economics Department Working Paper Series

37 Pages Posted: 5 Apr 2009

See all articles by Robert S. Gazzale

Robert S. Gazzale

University of Toronto - Department of Economics; Williams College - Department of Economics

Lina Walker

AARP-Public Policy Institute

Date Written: March 25, 2009

Abstract

We conduct a neutral-context laboratory experiment to systematically investigate the role of the hit-by-bus concern in explaining the annuitization puzzle: the low rate of retirement-asset annuitization relative to the predictions of standard models. We vary endowed asset (annuity vs. stock of wealth vs. no explicit endowment), and find a strong endowment effect. Furthermore, we find that the ordering of survival risks matters. Compared to a frame in which a single draw from a known distribution determines survival outcome, annuity choice is lower when subjects must sequentially survive early periods to reach periods in which the annuity dominates. We conclude with policy implications.

Keywords: experimental economics, behavioral, retirement, annuities

JEL Classification: C91, D14, D81, G22, J26

Suggested Citation

Gazzale, Robert S. and Walker, Lina, Behavioral Biases in Annuity Choice: An Experiment (March 25, 2009). Williams College Economics Department Working Paper Series, Available at SSRN: https://ssrn.com/abstract=1370535 or http://dx.doi.org/10.2139/ssrn.1370535

Robert S. Gazzale (Contact Author)

University of Toronto - Department of Economics ( email )

150 St. George Street
Toronto, Ontario M5S 3G7
Canada
416.978.2123 (Phone)

HOME PAGE: http://www.economics.utoronto.ca/gazzale/

Williams College - Department of Economics ( email )

24 Hopkins Hall Drive
Williamstown, MA 01267
United States

Lina Walker

AARP-Public Policy Institute ( email )

601 E. Street, NW
Washington, DC 20049
United States

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