Center for Advanced Management




Prof. Richard D. MacMinn (Illinois State University)


  • Datum: 10.03.2011
    Zeit: 17:00 - 18:15
    Ort: Raum 307, Schackstr. 4/III

The annuity Puzzle

Consumption-saving behavior has been studied and discussed by economists including Marshall and Fisher (Marshall 1920; Fisher 1930), but until Yaari (Yaari 1965) the question of how a consumer should optimally allocate her limited resources over an uncertain lifetime had not been carefully addressed. In his seminal piece, Yaari extends the analysis of optimal consumption plans by maximizing an investor’s expected utility over a random time horizon. In particular,

Yaari shows that investors without bequest motives will find it optimal to completely annuitize their savings. In view of this result, Friedman and Warshawsky note: It is startling, at least for economists who view consumption-saving behavior within the framework of the familiar life-cycle model, to confront the fact that in the United States few individuals purchase life annuities. According to the life-cycle model, the chief principle governing individual saving behavior is the desire to smooth consumption patterns over one's lifetime, within the constraints imposed by limited lifetime resources.1 Indeed the full annuitization results or predictions have become known as the annuity puzzle because the life annuity markets in the United States and elsewhere are so thin.2 The objective of

this analysis is not to review3 the many attempts to solve the annuity puzzle but is to extend the expected utility paradigm to provide the economic foundations for the investigation of life insurance and life annuities. The working hypothesis here is that the foundations of life insurance and life annuities have not been adequately developed and that an altered paradigm that explains the demand for life insurance is also essential to understanding the anemic annuity market…