Consumer Preferences for Annuity Attributes: Beyond Net Present Value

Abstract

Decisions about life annuities are an important part of consumer decumulation of retirement assets, yet are relatively underexplored by marketing researchers studying consumer financial decision-making. In this paper we propose and estimate a model of individual preferences for life annuity attributes using a choice-based stated-preference survey. Annuities are presented in terms of consumer-relevant attributes such as monthly income, yearly adjustments, period certain guarantees, and company financial strength. We find that attributes directly influence preferences beyond their impact on the annuity's expected present value. The strength of the direct influence depends on how annuities are described: when represented only via basic attributes, consumers undervalue inflation protection and preferences are not monotonically increasing in duration of period certain guarantees. When descriptions are enriched with cumulative payment information, consumers no longer undervalue inflation protection, but nonlinear preferences for period certain options remain. We find that among annuities with the same expected payout but different annual increases and period certain guarantees, the proportion of consumers choosing the annuity over self-management can vary by more than a factor of two. With baby boomers now retiring at the rate of almost 10,000 per day, the issue of decumulation of retirement assets is increasingly important to economists, public policy experts, and the financial services industry. It should also be of interest to researchers in marketing because consumers in the market for decumulation products, such as annuities, face a choice problem with large financial stakes, limited learning opportunities, difficult consumption tradeoffs, multiple sources of uncertainty, issues of trust and branding, and long time periods. All of these aspects of the decumulation problem are topics on which marketing research can offer important insights. This paper studies the structure of consumer preferences for life annuities -an important class of decumulation products. We employ a choice-based conjoint analysis to measure consumer preferences and relate them to the underlying financial value of the products. KeywordsAnnuities, as well as many other financial products, provide a unique setting for choice modeling because most annuity attributes have calculable expected present value that can be directly compared to consumers' revealed utilities. Consequently, we are able to see whether an attribute influences demand only through its contribution to the normative net present financial value of the annuity product ("NPV"), or whether attribute values have psychological worth "beyond NPV." We find that a typical consumer choosing from a set of annuities does not merely maximize the expected financial value, but also reacts to several product attributes directlyexpressing preferences beyond the effect of attributes on the financial value. For example, most consumers overvalue medium (10-20 years) levels of period-certa...

The pivotal role of fairness: Which consumers like annuities?

“…The importance of fairness as a predictor for liking of annuities was also documented in Shu et al (); this paper explores this finding, as well as other characteristics of individuals who dislike annuities, in much greater detail.…”

“…Most recently, Brown, Kapteyn, Luttmer, and Mitchell (2017) find experimental evidence for narrow bracketing, demonstrating that survey respondents encouraged to think about spending during retirement are more likely to properly value annuities. In our prior work, we have found that information displays that help individuals "do the math" on the cumulative value of annuity payouts can affect both overall interest in annuities and demand for particular annuity attributes (Shu, Zeithammer, & Payne, 2016; see also Kunreuther, Pauly, & McMorrow, 2013). These behavioral explanations of the annuity puzzle provide important insights, but many more aspects of the decision remain to be investigated and tested.…”

Time inconsistent preferences and the annuitization decision

“…In both scenarios older participants tend to choose the lump sum whereas younger participants prefer the annuity. Therefore, the main hypotheses 1(a) and 1(b) are confirmed, see also Brown et al (2012) and Shu et al (2013) who find negative age effects using Croatian pension and survey data. In both scenarios all other demographic variables are insignificant.…”

“…This result is supported by Chalmers and Reuter (2012) who find a positive connection between recent stock returns and the selection of the lump sum. Shu et al (2013) model and measure individual preferences for annuities using a conjoint survey. This technique allows them to separately elicit preferences for different attributes of the annuity (e.g., period certain, inflation adjustment).…”

Behaviorally informed policies for household financial decisionmaking

“…The government could, for instance, emphasize the value of an annuity in ensuring that individuals do not outlive their financial resources while de-emphasizing how long an individual would need to live to get a positive return. 45,[74][75][76][77] Saving for Short-Term Needs Individuals have many reasons to save other than for retirement. They face known expenses for which they can plan, like the down payment for a house or college tuition for their children.…”