This is a summary of the paper "Behavioural Impediments to Valuing Annuities: Complexity and Choice Bracketing" by by Jeffrey R, Brown, Arie Kapteyn, Erzo F.P. Luttmer, Olivia S.Mitchell and Anya Samek.
Behavioural Impediments to Valuing Annuities: Complexity
and Choice Bracketing
This is a paper by Jeffrey R, Brown, Arie Kapteyn, Erzo F.P. Luttmer, Olivia S.
Mitchell and Anya Samek.
Table of content
- Front page:Behavioural Impediments to Valuing Annuities: Complexity
and Choice Bracketing
- Abstract/presentation of the paper’s main findings/main question
- What are the central findings?
- Why is an answer to the question so important?
- How does the findings improve over what others researchers have already
done?
- What method is used to address the question?
- What data/variables are used?
- Conclusion
- What are the other findings?
- What are the weaknesses of the paper (if any?) What questions does it
leave open?
- Questions from the class?
What is the paper’s main question?
Abstract
An annuity is a stream of future cash flows, which will be an equal amount for
each month, that will be received until the due date or until the day you die.
Pension related annuities, also called “whole life annuity” are a type of annuity
that will provide the owner with cash flows for as long as they live. Currently,
there is a small demand for annuity products despite the clear benefit that they
can help prevent people from outliving their assets. Why is it then the case that
few people choose to buy annuity products? This paper examines two
behavioural factors that diminish people’s ability to value a life-time income
stream or annuity.
What are the central findings of this study
These are the two main findings of the experiment:
1
, The first finding of this study was that, when the complexity of the annuity
choice is increased, it reduces the respondents’ ability to value the annuity. In
the study, respondents were asked to assign a buy and sell value to the annuity.
The researchers measured their ability to value the annuity by measuring the
difference in the buy and sell value they assigned to the annuity. There was a
larger difference in the buy-sell spread when the complexity was increased. The
second finding was that respondents were better at valuing an annuity when
asked to think about the annuitization decisions jointly and think about how
quickly or slowly they should spend down (drawdown) their assets. The
researchers “conclude that narrow choice bracketing is an impediment to
annuitization yet this impediment can be mitigated with a relatively
straightforward intervention.”
Why is an answer to the question so important? (chapter 1: introduction)
Despite the ability of annuity products to insure against longevity risks,
interestingly, the market for annuities is still relatively small. The two main
findings from the research suggest that there is an existence of behavioural
factors which affect the ‘annuity puzzle’. Not all behavioural factors are known
but the researchers continue to suggest that some of these factors might stem
from institutions and by the framing of annuities.
How do the findings improve over what others already have done? (chapter
1: introduction)
Several hypothetical choice experiments suggest that behavioural factors
influence the demand for annuities including how annuities are framed.
Researchers have also shown framing to have had an effect on valuations of
annuities in other research, where individuals in a hypothetical choice setting
were observed to be divergent in their valuation for small increases and
decreases in annuitization. This supports the wide buy-sell spread found in this
research because people have trouble understanding and valuing annuity
products. Hence, the respondents want a high selling price (means they will get
a ‘larger’ value of their future cash flow stream’ now as the lump sum), but they
don’t understand the value of it, so they tend to offer a too low buying price. In
essence, the research suggests that individuals will be reluctant to buy an
annuity product because they do not understand what the product is and how to
value it.
2
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