Jeffrey R. Brown
University of Illinois at Urbana-Champaign
TIAA-CREF Institute Fellow
Jeffrey R. Kling
The Brookings Institution
Marian V. Wrobel
January 2009 |
Despite agreement among experts that many consumers should place a high value on life annuities and related products that insure against longevity risk, few consumers voluntarily annuitize their retirement savings. This brief summarizes evidence that consumers’ aversion to annuities is not a fully rational phenomenon. Research finds that framing, i.e., how financial products are presented to consumers, can significantly affect respondents’ preferences among competing products. Specifically, when products are presented in a frame that emphasizes consumption consequences, 72 percent of survey respondents prefer a life annuity to a savings account. In contrast, when the same products are presented using investment terminology, only 21 percent of respondents prefer the annuity.
This research helps to explain why so few individuals annuitize. The evidence is consistent with the hypothesis that when consumers think in terms of consumption, they perceive the life annuity as offering valuable insurance against the risk of outliving one’s resources. However, when they think in investment terms, they view life annuities as increasing risk without increasing return, because of the potential for variation in the total value of payments based on how long they live. This suggests that organizations that seek to promote the purchase of life annuities and related products may wish to employ the consumption frame in their customer interactions.
At a more conceptual level, consumers’ apparent sensitivity to framing and context in the survey setting raises the concern that consumers may not be making fully considered financial choices in the market setting; we define fully considered choices as choices that consumers themselves would not change in the face of additional or alternative information. In response to this concern, organizations that seek to increase consumer well-being via promoting wise financial choices may wish to pay careful attention to the psychology of choice and subtle aspects of how financial information is presented to those making important decisions.