Business Economics and Public Policy Papers

Document Type

Journal Article

Date of this Version

4-8-2017

Publication Source

Journal of the European Economic Association

Volume

15

Issue

2

Start Page

429

Last Page

462

DOI

10.1093/jeea/jvw009

Abstract

This paper documents consumers’ difficulty valuing life annuities. Using a purpose-built experiment in the American Life Panel, we show that the prices at which people are willing to buy annuities are substantially below the prices at which they are willing to sell them. We also find that buy values are negatively correlated with sell values and that the sell–buy valuation spread is negatively correlated with cognition. This spread is larger for those with less education, weaker numerical abilities, and lower levels of financial literacy. Our evidence contributes to the emerging literature on heterogeneity in financial decision-making abilities, particularly regarding retirement payouts.

Copyright/Permission Statement

This is a pre-copyedited, author-produced PDF of an article accepted for publication in Cognitive Constraints on Valuing Annuities following peer review. The version of record Jeffrey R. Brown, Arie Kapteyn, Erzo F.P. Luttmer, Olivia S. Mitchell; Cognitive Constraints on Valuing Annuities, Journal of the European Economic Association, Volume 15, Issue 2, 1 April 2017, Pages 429–462 is available online at: https://doi.org/10.1093/jeea/jvw009

Embargo Date

4-8-2019

Available for download on Monday, April 08, 2019

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Date Posted: 27 November 2017

This document has been peer reviewed.