It's heartbreaking to see a hero crossover from the land of purity and innocence to the dark side. Behavioral finance, like the Force, has both a good side and a dark side. We can use behavioral studies to at least explain why people make bad decisions if not to help them make better decisions (the good side). Unfortunately, we can use those same studies to learn how to manipulate people (the dark side).
I don't know if it's the low pay of the academic research profession or what, but it's not unusual to see a researcher known for using his work to defend the masses suddenly switch to using his work for the benefit of those intent on taking advantage of the masses. If you want to see how this happens, just read this review of Robert Cialdini's Yes! 50 Scientifically Proven Ways to Be Persuasive and contrast it to this review of Cialdini's earlier book, Influence: The Psychology of Persuasion. Cialdini's Influence, published in 1984, emphasizes how the reader can defend against behavioral trickery, while Yes! shows the reader how to use behavioral techniques to attack the unsuspecting.
In the end, the sales and marketing lessons of Cialdini aren't too far removed from the world of investing and, specifically, the 401(k) environment. For years, smart fiduciaries have followed the now decades-old studies of Shlomo Benartzi and Richard Thaler. Their research, from naïve diversification strategies to myopic loss aversion have helped 401(k) plan sponsors create investment policy statements and frame the options within their plans to help employees make better investment decisions.
Recommended For You
But now they (together with Alessandro Previtero) have released a working paper purporting to "solve" the annuity "puzzle". This so-called "puzzle" exists in the rarified air of staid finance departments of various universities. It claims, since a rational investor would be better off buying a sure thing (i.e. an annuity) rather than a risk (i.e. an equity portfolio), an anomaly occurs when real world investors fail to buy annuities. I'm not kidding. This is a real academic phenomenon, not a commercial for an insurance company.
Benartzi and Thaler's paper attempt to show how policy makers and plan sponsors can game retirement plan options to force employees to make the "correct" decision (thus doing the work of the insurance salesman without the actual intervention of the insurance salesman). This is skullduggery at its best. They may have just completed reading Cialdini's Yes! before writing this paper (or perhaps Machiavelli's The Prince).
As with Cialdini, the point is made if we contrast the pair's current paper with something they worked on earlier in their career—the equity premium puzzle. The equity premium puzzle is another relic from the era of modern portfolio theory that suggests equity investors earn "too much" versus bond investors. In 1995, Benartzi and Thaler used behavioral techniques to explain this apparent anomaly (click this link to discover how they did it). They didn't try to change the way investors behaved, they only explained why that behavior justifies the "premium."
In addressing the annuity puzzle, these two icons flipped their modus operandi. Instead of using behavior techniques to explain and justify the existence of this anomaly, they used their vast knowledge to map out a methodology to get people to conform to the theory from which this puzzle arose. In the end, they show how to sell more annuities.
And who sponsored this study? It appears the research was sponsored by the Allianz Global Investors Center for Behavioral Finance. The paper contains the following disclaimer: "Allianz Global Investors was not involved in the development or preparation of this paper. Any views expressed reflect the current views of the authors." Benartzi is chief behavioral economist for the Allianz Global Investors Center for Behavioral Finance and Thaler serves on the academic advisory board of the Allianz Global Investors Center for Behavioral Finance. It gets worse. Thaler is also a principal of Fuller & Thaler, a sub-adviser to an Allianz fund.
And, within its constellation of companies, what is one of Allianz' biggest products? Annuities.
Somewhere, under his black mask, Darth Vader is smiling.
© 2025 ALM Global, LLC, All Rights Reserved. Request academic re-use from www.copyright.com. All other uses, submit a request to [email protected]. For more information visit Asset & Logo Licensing.
Christopher Carosa
Chris Carosa has been writing a weekly article and monthly column for BenefitsPRO online and BenefitsPRO Magazine since 2011 and is a nationally recognized award-winning writer, researcher and speaker. He’s written seven books, including From Cradle to Retire: The Child IRA; Hey! What’s My Number? – How to Increase the Odds You Will Retire in Comfort; A Pizza The Action: Everything I Ever Learned About Business I Learned By Working in a Pizza Stand at the Erie County Fair; and the widely acclaimed 401(k) Fiduciary Solutions. Carosa is also Chief Contributing Editor of the authoritative trade journal FiduciaryNews.com and publisher of the Mendon-Honeoye Falls-Lima Sentinel, a weekly community newspaper he founded in 1989. Currently serving as President of the National Society of Newspaper Columnists and with more than 1,000 articles published in various publications, he appears regularly in the national media. A “parallel” entrepreneur, he actively runs a handful of businesses, including a small boutique investment adviser, providing hands-on experience for his writing. A trained astrophysicist, he also holds an MBA and has been designated a Certified Trust and Financial Advisor. Share your thoughts and story ideas with him through Facebook (https://www.facebook.com/christophercarosa/)and Twitter (https://twitter.com/ChrisCarosa).
