1 Default and 1 / N Heuristics in Annuity Choice

Choices of retirement income stream products pose the usual challenges associated with credence goods. Moreover, high perceived (and actual) risk, irreversibility of most purchases, high expenditure, little opportunity for social learning and distant consequences make these choices even more intimidating to consumers. Nevertheless, governments worldwide have started to shift more responsibility for these choices to ordinary individuals, leading to decisions often driven by suboptimal heuristics instead of careful evaluation of alternatives. This paper focuses on choices of life annuities by separating consumers’ preferences from their use of default options and the 1/n heuristic in an online allocation task experiment. We use a finite mixture model to show the extent to which specific consumer groups follow simplified choice heuristics, and profile members of the groups. Our results have important implications for public policy and marketing related to annuities, but also more generally for understanding the impact of heuristics in choices of credence goods like financial products and health care.