Journal of Economic Literature (JEL) Code(s)
D14, D84, D91, J14
The “annuity puzzle” refers to the fact that annuities are rarely purchased despite the longevity insurance they provide. Most explanations for this puzzle assume that individuals have accurate expectations about their future survival. We provide evidence that individuals misperceive their mortality risk, and study the demand for annuities in a setting where annuities are priced by insurers on the basis of objectively-measured survival probabilities but in which individuals make purchasing decisions based on their own subjective survival probabilities. Subjective expectations have the capacity to explain signiﬁcant rates of non-annuitization, yielding a quantitatively important explanation for the annuity puzzle.
O'Dea, Cormac and Sturrock, David, "Survival Pessimism and the Demand for Annuities" (2021). Cowles Foundation Discussion Papers. 2601.