The Annuity Puzzle and Negative Framing

Jeffrey R. GerlachJulie AgnewLisa R. Anderson Lisa R. Szykman

IB#8-10

Introduction

For years, researchers have been puzzled by why so few people purchase fixed, immediate, lifetime annuities for their retirement portfolios. Rational theories have been proposed, but none can fully explain the small size of the actual market. Very recently, academics have turned their attention to possible psychological reasons for the low demand. Interestingly, despite the well-established role psychology plays in other important retirement decisions — for example, 401(k) participation — the behavioral finance aspects of the retirement distribution phase have been largely understudied. In addition, finance researchers are realizing how much can be learned from the established field of marketing, where the role of psychological biases in all types of decisionmaking has been long understood. This brief discusses how marketing, and in particular the framing of the message, can affect a purchaser’s decision to buy an annuity. This decision is becoming increasingly important given the shift to 401(k) plans, as individuals will need to determine how best to manage their accumulated nest egg in retirement.