Occasional reflections on Life, the World, and Mathematics

Posts tagged ‘age’

The secret to a long life

It’s well known that marriage is an important factor in longevity. But maybe we’ve been interpreting that wrong, or, at least, not optimising.

From the Gerontology Research Group article on the current oldest living person, Italian Emma Morano:

In 1926, Mrs. Morano was married to Giovanni Martinuzzi, a marriage she would rather not talk about… Having separated – but not divorced – from her husband in 1938, Mrs. Morano has lived alone ever since, and accredits this as one of the key secrets to her longevity.

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. (more…)

Tag Cloud