The annuity puzzle

Stanford biodemographer Shripad Tuljapurkar has written a very thoughtful post about the “annuity puzzle”: Why do people generally not choose to purchase annuities that would seem to protect them from a major risk: Being feeble and impoverished 30 or 40 years after retirement? His explanation, which is surely right as far as it goes, is that the shunning of annuities is a rational response to the compensating default risk from the insurance company. You have to live quite a long time to make your nut on an annuity. The “risk” — the probability of living that long — is low, and (he argues, persuasively) one could reasonably conclude that it is outweighed by the likelihood of a financial crash in the interim.

From a behavioural economics perspective, this matches closely one of the standard explanations for discounting: Future returns are drastically uncertain, so we develop the habit of preferring immediate gratification. So this falls in the category of attempts to explain seemingly irrational economic behaviour by showing that it is in fact rational when you take into account limited information or costs of acquiring or analysing information. Of course, any economic theory inevitably struggles to deal with questions of insurance and annuities, where the risk involves the life of the economic agent. The celebrated analysis of this problem by Jack Benny is still relevant.

But while this is a cogent argument for why people shouldn’t buy annuities, I’m skeptical of it as an explanation for why they don’t buy annuities. First, the annuity puzzle is a phenomenon of average people, not savvy investors. I doubt that most people think much about the risk of established financial companies defaulting. One prominent study (based on surveys conducted in 2004) found that 59% of Americans would trade half of their Social Security annuity for an actuarially fair lump sum payment. I’m pretty sure that they are not thinking that they can find a safer investment, with less risk of default, than Social Security. Continue reading “The annuity puzzle”

“Soon enough”

This picture of a British army tank having crushed an automobile that strayed into its path in a small German town has gotten quite a lot of attention.

Tank vs car

Here is the comment of the British military spokesperson:

“Our tank crews go through a very rigorous training process,” he said, reportedly adding that three members of personnel inside monitor the road “which is why they were able to stop soon enough”.

Looking at the photograph, I wonder what would have counted as not stopping “soon enough”. One can imagine similar applications of this Zieglerism. “The Titanic had very rigorous iceberg detection procedures, which is why it was able to stop soon enough.” “The Bush administration had very rigorous antiterrorism procedures, which is why they were able to defend the country adequately against Al Qaeda attacks.” (All but one! 7 1/2 years without an attack!)

More self-deconstructing clichés: Europe edition

I have commented before (here and here) on the weird linguistic phenomenon of clichés being modified to eliminate their actual meaning. Here is an example from yesterday’s BBC report on David Cameron’s attempts to convince other European leaders to support his efforts to rescue his leadership of a fractured Conservative Party reform the European Union:

This was a chance to try to repair burned bridges.

The whole idea of the expression “burn your bridges” is that THERE’S NO MORE BRIDGE! You can’t repair it! Sure, in reality a burned bridge might not have burned completely, so repairs could still be undertaken. But why invoke a metaphorical burned bridge if you actually mean to play down the burn?

What is the writer thinking? “Many people complain that David Cameron has burned his bridges to fellow European leaders. While this is true, those bridges are constructed largely of metaphorical stone, so the damage from burning is not nearly as great as if they had been constructed of metaphorical wood, and repairs are still eminently possible.

“Some in the Conservative Party argue for dynamiting the main pylons of the metaphorical bridges. Metaphorically.”

One might similarly tell of how Alexander the Great, on arriving in Persia, ordered that the ships be burned. But only on the edges, of course, because otherwise they would no longer be seaworthy.

A tricky judgement call for the advertising agency

So you’re the head of the Adobe account, seeking to convince customers that Photoshop is a professional level software tool accessible to the masses. It’s used for important work by experts! It makes news! So now, the question is, do you seek an endorsement based on this news report (from Der Spiegel)?

Russland macht noch immer Kiew für den Abschuss von Flug MH17 verantwortlich. Doch die Fotos, die ukrainische Luftabwehrsysteme in dem Absturzgebiet zeigen sollen, sind offenbar gefälscht. Laut Experten hat der Kreml mit Photoshop manipuliert.

[Russia still claims that Kiev is responsible for shooting down flight MH17. But the photos that supposedly show Ukrainian air defence systems in the area of the crash are blatantly fake. Experts say the Kremlin manipulated them with Photoshop.]