Life Expectancy as a Constructed Belief: Evidence of a Live-To or Die-By Framing Effect

Payne, John W.; Sagara, Namika; Shu, Suzanne B.; Appelt, Kirstin C.; Johnson, Eric J.

doi:10.2139/ssrn.1987618

Cited by 27 publications

(44 citation statements)

References 30 publications

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“…Life expectancy is based on the individual-level subjective assessment of the probability of surviving until 65, 75, 85, and 95. The subjective probabilities are used to estimate a Weibull survival model via maximum likelihood (see Payne et al 2013), and the individual life expectancy is then derived as a plug-in estimate of the expected value of the Weibull random variable at the maximum likelihood parameter estimates. Note: Posterior means of Δ (the marginal effects of demographic and psychographic variables on the utility parameters).…”

Section: Discussionmentioning

confidence: 99%

“…The consumer's risks in consuming saved assets include either spending too quickly, in which case she may run out of money, or spending too slowly, in which case her consumption is severely constrained and she dies with unused funds. Also complicating this decision is the large uncertainty about life expectancy, a crucial piece of knowledge for determining the optimal intertemporal consumption path (Payne et al 2013). …”

Section: The Role Of Annuities In Consumer Decumulationmentioning

confidence: 99%

“…To try and explain some of the population heterogeneity we observe, we collect several key demographic and psychographic measures from each participant. Because life expectancy is a key life cycle input for decumulation choices, we ask each individual how long they expect to rely on their retirement funds by having them indicate the probability that they will live to ages 65, 75, 85, and 95 (Payne et al 2013). Longer life expectancy should both raise consumer preference for annuitization, increase the value placed on inflation protection, and reduce the value placed on period certain guarantees.…”

Section: A Study Of Consumer Preferences For Annuity Attributesmentioning

confidence: 99%

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Consumer Preferences for Annuity Attributes: Beyond Net Present Value

Shu

Zeithammer

Payne

2016

Journal of Marketing Research

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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...

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Section: Discussionmentioning

confidence: 99%

Section: The Role Of Annuities In Consumer Decumulationmentioning

confidence: 99%

Section: A Study Of Consumer Preferences For Annuity Attributesmentioning

confidence: 99%

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Consumer Preferences for Annuity Attributes: Beyond Net Present Value

Shu

Zeithammer

Payne

2016

Journal of Marketing Research

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“…The questions were formulated so as to be as clear as possible to respondents, and they were framed in terms of survival, rather than death, as the latter tends to engender stronger beliefs in mortality (Payne et al (2013)). Respondents were also asked to indicate their expected longevity, in a manner not unlike that of the SCF.…”

Section: Survey Descriptionmentioning

confidence: 99%

YOLO: Mortality Beliefs and Household Finance Puzzles

Heimer

Myrseth²,

Schoenle³

2015

Working Paper (Federal Reserve Bank of Cleveland)

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Subjective mortality beliefs affect pre-and post-retirement consumption and savings decisions, as well as portfolio allocation. New survey evidence shows that individuals overestimate their mortality at short horizons and survival rate at long horizons. For example, a 28-year-old male with a 99.4% chance of surviving beyond 5 years believes he will do so with 92.8% probability. A 68 year old with a 71.4% probability of living to 78 believes he has an 82.4% chance of living that long. The formation of these beliefs across age cohorts can be attributed to overweighting salient causes-of-death. This bias matters empirically: Survival expectations correlate with heterogeneity in fi nancial education and investment behavior. Embedded in a run-of-the-mill life-cycle model, these beliefs cause the young to under-save and retirees to not fully draw down their assets. In addition, for reasonable levels of risk-tolerance, the required excess rate of return on equity is in line with historical averages once subjective beliefs are accounted for.

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“…Yet, there is evidence that policyholders-or at least some policyholders-do not correctly anticipate these shocks, and lapses are higher than predicted by a rational expectations model. 4 These results are in contrast to contributions from the behavioral literature indicating that individuals fare poorly at forecasting their own mortality prospects (Elder, 2013;Payne et al, 2013). Furthermore, findings with regards to informational advantages upon purchasing life insurance are mixed (Cawley and Philipson, 1999;He, 2009). Given that the primary drivers are idiosyncratic, yet the prevalence of these idiosyncrasies may vary by policy parameters such as age, underwriting method, risk class, etc., it is not surprising that insurers primarily consider these deterministic aspects when modeling lapsation for the purpose of pricing or policy valuation.…”

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confidence: 91%

Policyholder Exercise Behavior in Life Insurance: The State of Affairs

Bauer

Gao²,

Moenig

et al. 2017

North American Actuarial Journal

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The paper presents a review of structural models of policyholder behavior in life insurance.We first discuss underlying drivers of policyholder behavior in theory and survey the implications of different models. We then turn to empirical behavior and appraise how well different drivers explain observations. The key contributions lie in the synthesis and the systematic categorization of different approaches. The paper should provide a foundation for future studies, and we describe some important directions for future research in the conclusion.

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Life Expectancy as a Constructed Belief: Evidence of a Live-To or Die-By Framing Effect

Cited by 27 publications

References 30 publications

Consumer Preferences for Annuity Attributes: Beyond Net Present Value

Consumer Preferences for Annuity Attributes: Beyond Net Present Value

YOLO: Mortality Beliefs and Household Finance Puzzles

Policyholder Exercise Behavior in Life Insurance: The State of Affairs

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