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Department of Applied Finance and Actuarial Studies

Seminar by Professor Susan Thorp

Research Seminars - business and economics
  • Topic: Disengagement: A partial solution to the annuity puzzle
  • Speaker: Professor Susan Thorp, Professor of Finance and Superannuation, UTS Business School
  • Venue:E4A 623
  • When: 5th April, 2013, (Fri)
  • Time: 11.30am - 12.30pm (Morning Tea from 11am)

This research studies whether individuals make choices consistent with expected utility
maximization in allocating wealth between a lifetime annuity and a phased withdrawal account
at retirement. The paper describes the construction and administration of a discrete
choice experiment to 854 respondents approaching retirement. The experiment finds overall
rates of inconsistency with the predictions of the standard CRRA utility model of roughly
50%, and variation in consistency rates depending on the characteristics of the respondents.
Individuals with poor numeracy and with low engagement with the choice task, as measured
by scores on a task-specific recall quiz, are more likely to increase allocations to the phased
withdrawal as the risk of exhausting it increases. Individuals with higher scores on tests of
financial capability and with knowledge of retirement income products are more likely to
score high on the engagement measure, but capability and knowledge do not have independent
effects on consistent choice rates. Results suggest that initiatives to improve specific
product knowledge and to help individuals engage with decumulation decisions could be a
partial solution to the annuity puzzle.

View the full paper "Disengagement: A partial solution to the annuity puzzle" (PDF)



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