The Tontine Puzzle

Abstract:

Under both normative and descriptive decision theory, tontines and tontine-related retirement income products have proven their superiority to classical annuity products. In the present paper, we show that benefits of a properly designed tontine dominate the benefits of an equally priced annuity as the pool size tends to infinity, leading individuals to prefer tontines with a sufficiently large pool size to annuities under utility preferences which are increasing and continuous in consumption. Such preferences include but are not limtied to cumulative prospect theory and generalized expected utility preferences, which we use as examples to illustrate our theoretical findings. Our results present an interesting puzzle which we call “tontine puzzle”, raising the question why the development of the tontine market is still in its infancy in practice.