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M ULTIPLE R EFERENCE P OINTS AND THE D EMAND FOR P RINCIPAL ‐P ROTECTED L IFE A NNUITIES : A n E XPERIMENTAL A NALYSIS
Author(s) -
Knoller Christian
Publication year - 2016
Publication title -
journal of risk and insurance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.055
H-Index - 63
eISSN - 1539-6975
pISSN - 0022-4367
DOI - 10.1111/jori.12101
Subject(s) - annuity , economics , microeconomics , actuarial science , prospect theory , life annuity , finance , pension
A BSTRACT We conducted an experiment in which participants were confronted with an experimental annuitization decision. Previous research has argued in favor of the hypothesis that a combination of mental accounting and prospect theory can explain why annuities containing a capital guarantee are preferred to standard annuities. However, from this perspective people would not annuitize their assets at all, but rather invest the money in a risk‐free alternative. Recent research has also suggested a “cushion effect.” When all possible outcomes of two options are above a certain goal, this goal serves as a cushion in case of unfavorable outcomes. Hence, individuals might have a higher propensity to exhibit risk‐seeking behavior. We find that individuals were indeed more willing to choose the annuity option if it contained a capital guarantee and that individuals using this guarantee as a cushion were even more willing to choose the annuity. Thus, the cushion effect can partially explain the high demand for guarantee features in annuity contracts.