Can Smoking Harm Your Long-Term Saving Decisions?

Previous research suggests that cigarette smoking is considered to be a major preventable risk to human health. One explanation for smoking, provided by the literature, is that it could be explained by differences in time preferences; smokers are considered to have higher discount rates, implying that they will demand higher compensation in order to postpone any consumption from the present to the future. Concerns that are related to time preference and individual choices are also related to long-term saving decisions. One of the long standing puzzles, with regard to long-term saving choices, is the “Annuity Puzzle”. Theory suggests that annuities have substantial value, and that retirees should generally use annuities to increase their utility in retirement. However, empirical work finds little evidence of the purchase of annuities. We extend this line of research, investigating annuitization decisions of smokers, by using data from an Israeli insurance corporation. We find that, surprisingly, smokers, as compared to non-smokers, do not prefer the lump-sum option. A possible explanation for this finding could be that even though literature finds a close relationship between smoking and medical condition, smokers do not perceive themselves as having a shorter lifespan, meaning that smokers experience self-illusions regarding life expectancy. We support this conjecture with a survey we conducted that investigated the life expectancy and health perception of smokers and non-smokers. 1 Department of Finance, Jerusalem school of business, the Hebrew university of Jerusalem, Israel [email protected] 2 Department of Finance, Jerusalem school of business, the Hebrew university of Jerusalem, Israel [email protected] We have benefited from comments by Doron Avramov, Eyal Lahav, Oded Sarig, Steve Zeldes, participants at the 2016 Financial Literacy Research and Practice conference at Ben Gurion University and seminar participants at the Hebrew University and Tel-Aviv University. This project received financial support from the Kruger Center at the Hebrew University (Sade), and from the Israeli ministries of Finance and Science (Hurwitz).