Portfolio Choice and Longevity Risk in the Late Seventeenth Century. A Re-Examination of the First English Tontine

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 an option to select between the two. This paper analyzes financial and economic aspects of King William's 1693 tontine that have not received attention in the financial economic literature. In particular, I compare the stochastic present value (SPV) of the tontine vs. the life annuity and discuss characteristics of investors who selected one versus the other. Finally, I investigate whether the recorded 1693 tontine survival rates -- which are abnormally high relative to population mortality rates in the late 17th century -- should be attributed to anti-selection effects or perhaps to fraudulent behaviour. In sum, this paper is an empirical examination of annuitization decisions made by investors over three hundred years ago.

Keywords: annuities, pensions, mortality-contingent claims, financial revolution

JEL Classification: N23, G11, B16, H31