Psychological Aspects of Decumulation Decisions: The Case of Tontine Insurance

Decumulation decisions appear to cause difficulty for many investors, limiting demand for products such as annuities and reverse mortgages. The decumulation process is difficult because it entails two major risks: running out of money by spending too fast versus dying early and unintentionally leaving behind a substantial amount of unused funds. One product that appeared to address both sides of this risk tradeoff is tontine insurance, which became popular in the US in the late 1800’s. While tontine insurance is now illegal in the US, an effort to understand the psychological factors like intertemporal optimism and perceived fairness that made tontine insurance so successful in the past may allow us to develop more effective approaches for the annuity products of today. Psychology of Decumulation, S. Shu