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Portfolio choice and longevity risk in the late seventeenth century: a re-examination of the first English tontine

Published online by Cambridge University Press:  22 October 2014

Moshe A. Milevsky
Moshe A. Milevsky*
Affiliation:
York University, Canada
*
M. A. Milevsky is an Associate Professor of Finance at the Schulich School of Business, York University, and Executive Director of the IFID Centre, 222 College St, 2nd Floor, Toronto, ON M5T 3J1, Canada, [email protected]; web page: www.MosheMilevsky.com.
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Abstract

Tontines and life annuities both insure against longevity risk by guaranteeing (pension) income for life. The optimal choice between these two mortality-contingent claims depends on personal preferences for consumption and risk. And, while pure tontines are unavailable in the twenty-first century, the first longevity-contingent claim (and debt) issued by the English government in the late seventeenth century offered a choice between the two. This article analyzes financial and economic aspects of King William's 1693 tontine that have not received attention in the literature. In particular, it compares the stochastic present value (SPV) of the tontine vs the life annuity and discusses characteristics of investors who selected one versus the other. Finally, the article examines the issue of whether high reported tontine survival rates should be attributed to anti-selection or fraud. In sum, this article is an empirical examination of annuitization decisions made by actual investors in the late seventeenth century.

Keywords

annuitiespensionsmortality-contingent claims

JEL classification

G10: General
Type
Articles
Information
Financial History Review , Volume 21 , Issue 3 , December 2014 , pp. 225 - 258
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Copyright
Copyright © European Association for Banking and Financial History e.V. 2014 

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