Multiple reference points and the demand for principal-protected life annuities: an experimental analysis

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.