An Experimental Study of the Effect of Market Performance on Annuitization and Equity Allocations

Although researchers have studied the annuity puzzle for years, it has only recently been analyzed from a behavioral finance standpoint. This paper adds to this new stream of literature by using experimental methods to investigate how market performance affects the decision to annuitize. Using a large-scale, controlled laboratory experiment, this paper finds evidence that excessive extrapolation may be influencing this decision. In addition, we find that past market performance influences subsequent portfolio allocation decisions. This paper serves as a useful complement to recent studies using administrative data. Our experimental approach allows us to more cleanly test the role of past market performance by carefully controlling for many factors that may confound the analysis of administrative data.