The annuity or the lump sum?
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A fascinating question in behavioral economics is how people value lump sums vs. annuities (payments that are spread out over time).
Here are some readings on the topic:
- Should you take the annuity or the lump sum if you win the lottery (discussion in a news article)
- Warner, John T., and Saul Pleeter. The personal discount rate: Evidence from military downsizing programs. American Economic Review 91.1 (2001): 33-53. (Academic paper on soldier’s actual decisions about whether to take an annuity or a lump sum).
If you take a light gloss over the literature, one would think that people are overly attracted to the lump sum, that is, they discount the future too much. One recent paper, however, finds that the appeal of the annuity has much to do with the amount. Small annuity payments are quite unattractive, but large annuity payments become surprisingly attractive. The appeal of lump sums changes less as the amount varies:
- Goldstein, Daniel G. and Hershfield, Hal E. and Benartzi, Shlomo, The Illusion of Wealth and Its Reversal (Academic paper looking at how the decision depends on the amount of money at stake).
