Behavioral Impediments to Valuing Annuities: Complexity and Choice Bracketing

This paper examines two behavioral factors that diminish people's ability to value a lifetime income stream or annuity, drawing on a randomized experiment with about 4,000 adults in a U.S. nationally representative sample. We find that increasing the complexity of the annuity choice reduces respondents' ability to value the annuity, measured by the difference between the sell and buy values they assign to the annuity. When we limit narrow choice bracketing by inducing people to think first about how quickly or slowly to spend down assets in retirement, their ability to value an annuity increases.

Automated summary

This paper examines how increasing the complexity of annuity choices decreases people's ability to evaluate them, while encouraging individuals to think about asset spending in retirement first can improve their ability to value annuities.