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Dan Ariely is Back With A New Survey

Monday, July 25, 2011, 4:05 PM

Our good friend Dan Ariely, renowned behavioral economics researcher, is back with a new experiment that he's asking all of us to help with.

Many of you may recall the survey he posted on PeakProsperity.com back in January. The results were incorporated into a larger Harvard/Duke study exploring Americans' perceptions of wealth distribution. An important subject, as the wealth gap between rich and poor in many developed countries is now reaching all-time highs.

Now he's tackling people's thinking around retirement planning, another very timely topic given the large numbers of baby boomers with insufficient savings combined with today's saver-unfriendly interest and inflation rates. 

If you have 5 minutes and the interest, please fill out Dan's survey

Here's a bit more background in Dan's own words:

One of the biggest decisions we must all make is which long-term retirement security plan to invest in. In order to make an informed decision, it is important to explore in detail how these plans work, what their payouts are, and what the costs are associated with them. We have been exploring a few long-term retirement security plans ourselves and have created a survey both explaining the plans as well as getting your opinions on them. Please take a moment to consider these plans.

Thanks again to Dan and his team for valuing our opinion enough to extend this second opportunity to us. We'll publish the results here once they're available.

If you haven't done so already, listen to our interview with Dan from early this year on his work and how its findings help us better understand the human factor in economic decision-making.

Don't forget to take the survey! And if you're comfortable, recruit your friends and colleagues - Dan is hoping for several hundred entries. Let's see how close we can get.

cheers,

Adam


Dan is the James B. Duke Professor of Psychology & Behavioral Economics at Duke University, where he holds appointments at the Fuqua School of Business, the Center for Cognitive Neuroscience, the School of Medicine, and the Department of Economics. He is also a founding member of the Center for Advanced Hindsight.

Using simple experiments, Dan studies how people actually act in the marketplace, as opposed to how they should or would perform if they were completely rational. His interests span a wide range of daily behaviors and his experiments are consistently interesting, amusing, and informative, demonstrating profound ideas that fly in the face of common wisdom.

He is the author of the New York Times Bestseller Predictably Irrational: The Hidden Forces that Shape Our Decisions and The Upside of Irrationality: The Unexpected Ways We Defy Logic at Work and at Home. His research has been published in leading psychology, economics, and business journals, and is featured occasionally in the popular press.

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19 Comments

BSV's picture
BSV
Status: Silver Member (Offline)
Joined: Jan 26 2009
Posts: 170
I completed the survey, but

I completed the survey, but isn't the second option -- increasing payments over time based upon the deaths of the other annuitants -- a tontine? My understanding is that tontines are illegal. At one time they were wildly popular, but were outlawed by various governments with the passage of time.

Many years ago I worked in a life insurance company home office. It was a company in the assumption reinsurance business. That means buying blocks of in-force policies from other companies wanting to sell them for various reasons. The company owned a block of tontine life insurance policies that was originally written (issued) by a little company in Little Rock, Arkansas. If memory serves it was Equitable Investors Life Insurance Company. Memories fade over time, but I seem to recall that, fittingly, the company's logo was a pyramid. With the benefit of hindsight, perhaps it should have been a skull and crossbones, or maybe the fox guarding the chicken house. The pyramid was perhaps a bit too subtle.

Certainly the folks who designed those "Triple Pay" policies were schemers -- and it was perfectly legal at the time. By the time our company acquired the block of in-force business, tontines had been outlawed by state insurance commissioners, but existing policies were "grandfathered." I was fascinated by the intricate workings of those policies. I was responsible for paying the death claims and rearranging the cardex file every time someone died.

I noticed that the "Triple Pay" policy was a lot more expensive than a standard life insurance policy of the same face amount of insurance. This must have been pretty profitable for the issuing company. A lot of little life insurance companies got their start selling so-called "founder's policies" that contained some twist or gimmick designed to entice people to buy. That's an interesting footnote in the history of the life insurance business. Practices like that are generally banned today.

The Triple Pay policies worked like this: Suppose you purchased a $1,000 life insurance policy from the company (that was a popular amount back in the 1930s and early 1940s). If you died your beneficiary collected $1,000 and that was that. But each time someone else died you moved up in the rankings on the cardex system. Once you occupied position #1 in your category, the next time someone died your policy paid off and you got the proceeds while still living. I never saw or heard the sales pitch, but it must have been a wonder to behold. People did buy those policies, though.

There were several other twists and turns on those policies (the Triple Pay feature), including that a portion of the money you paid in (the premiums) was invested in the Dow Jones 30 Industrials. Remaining policyowners shared in the proceeds when the stocks were sold.

My point, though, is that unless something has changed since I retired a decade ago, tontines are illegal. Perhaps the federal government could introduce tontine annuities, but even that would likely lead to court challenges. So I have to wonder why the survey provided an alternative that seems impermissible under current law. I am scratching my head.

james_knight_chaucer's picture
james_knight_chaucer
Status: Silver Member (Offline)
Joined: Feb 21 2009
Posts: 160
 I guess it might be a way

 I guess it might be a way to encourage people to eat more healthily! 

Dragline's picture
Dragline
Status: Bronze Member (Offline)
Joined: Sep 10 2008
Posts: 54
Tontines

 Yes, I think Tontines are illegal.  Kind of a bad public policy incentive -- wanting other people to die early so you can cash in.

There are other similar financial products outside the life insurance area -- credit default swaps come to mind.

Bytesmiths's picture
Bytesmiths
Status: Silver Member (Offline)
Joined: Apr 29 2008
Posts: 220
"Status quo" assumptions

The entire survey seems irrelevant to me.

For one, I don't believe their actuary data. I don't think most of us will live longer than our parents did. When it comes to actuary data, I go with Gail The Actuary, whose current blog talks about the coming decline in standard of living, which probably correlates with reduced lifetime.

If that were my only gripe with the graph, I wouldn't make such a fuss. But it also implies "business as usual" in terms of growth and inflation. Although I've long held that growth must end, I'm currently reading Richard Heinberg's latest tome, The End Of Growth. Given what I know about the situation, I don't see how the financial growth implied in the chart makes any sense at all. When corrected for inflation, I think it is more likely that annuities will show negative growth, that is, you'll never get your principle back, let alone any gain.

I think we're heading into a period of no guarantees, a period of simeltaneous currency inflation and asset deflation, combined with permanently high unemployment. All bets are off!

Mark_BC's picture
Mark_BC
Status: Gold Member (Offline)
Joined: Apr 30 2010
Posts: 481
Bytesmiths wrote: with the
Bytesmiths wrote:

with the graph, I wouldn't make such a fuss. But it also implies "business as usual" in terms of growth and inflation. Although I've long held that growth must end, I'm currently reading Richard Heinberg's latest tome, The End Of Growth. Given what I know about the situation, I don't see how the financial growth implied in the chart makes any sense at all. When corrected for inflation, I think it is more likely that annuities will show negative growth, that is, you'll never get your principle back, let alone any gain.

I think that may be the point of the whole exercise, to compare us here on this board with the wider investing crowd. I presume virtually everyone here would choose option 1, the blue flat line, because we understand what inflation is going to be like in the medium to long term (much sooner than the 78 break even point). Contrast this with many of my co-workers who don't appreciate the magnitude of the currency devaluation on the horizon, who pour their hard earned money into RRSP's (401K's) thinking that perpetual exponential growth in their portfolio is great, but missing the critical point that inflation will be growing faster! They think that "a dollar is a dollar".

apismellifera's picture
apismellifera
Status: Bronze Member (Offline)
Joined: Jul 8 2010
Posts: 58
Maybe more going on here than it seems

This is pure speculation. 

I think that the two scenarios are somewhat obscured models of existing retirement plans.  Model "A" seems suspiciously like present-day Social Security (albeit without COLAs).  Not sure about Model "B" but perhaps it's the result of some major rework of the current system (maybe putting $100K into a portfolio of dividend paying stocks and reinvesting most of the proceeds).  The delayed gratification of plan B sure looks like a brochure from some mutual fund company, except that one can't just extrapolate past returns into the future. Real returns won't come anywhere close to historical averages for a long time, if ever. (IMHO)

Anthony Schiano's picture
Anthony Schiano
Status: Member (Offline)
Joined: Apr 9 2011
Posts: 2
Varies by scenario

Hard to choose which I'd prefer here. In this scenario, what is my total current net worth and the state of my preps when I make this $100K investment at age 65? Then, of course, I have to ask myself how much S do I see hitting the F and how soon? Are we talking "just" economic collapse and global financial reset, or are we talking Carrington Event redux for the 21st century? In a financial collapse, how does this annuity re-denominate my payout in whatever new currency comes into being? Does it survive at all? These very questions keep me from adding to my whole life insurance holdings currently.

It's easy to talk oneself into the idea that you'll outlive others in a safe, secure world that is still able to produce clean drinking water and antiobiotics and bring crude up from the ground. From where I sit today, the $100K looks better spent on farmland and various ... ahem ... tangibles. Then again, a prepper in a collapse may well outlive so many, with deaths coming so quickly, that Plan B payments may be able to outpace early-stage hyperinflation ... the mind boggles :)

That said, if you could wave a magic wand and assure me of a functioning, well-fed modern society for decades to come, I'd be front-loading whole life insurance policies for my kids, for use as financial tools throughout their lives. Instead, given the state of our world today, they have custom piggy banks with larger than normal openings.

The more I think about it, projecting this hypothetical choice into the reality of this very moment, I would do neither with $100,000K. While my actual use would vary depending upon the state of my preps, even if I considered myself "completely" prepared (whatever that would mean) for the coming days, I'd take $100K in metals, open-pollinated seeds, tools, ammo, etc. before either Plan A or B.

best wishes,

Anthony Schiano

a.k.a. "President Malthus" at www.MalthusUniversity.com

maceves's picture
maceves
Status: Gold Member (Offline)
Joined: Aug 23 2010
Posts: 281
time

 It still would be 20 years before you had more money with the second plan, and then gaining money when you are more than 86 years old.  What would you need the money for then?  How much will it really be worth?  At the end of it all, it would be a gamble to provide for your heirs, not for yourself.

Arthur Robey's picture
Arthur Robey
Status: Diamond Member (Offline)
Joined: Feb 4 2010
Posts: 3936
Promises, promises.

I know I was supposed to defer my pleasure, but experience has taught me not to believe in promises. In this case we promise that we will play by the rules and give you your due when other people die.

What will happen is the money will disappear.

If the money is on the table, pick it up.

rhare's picture
rhare
Status: Diamond Member (Offline)
Joined: Mar 30 2009
Posts: 1325
My choice would be neither..

I picked option one as well, but in real life I would choose neither.  So the case only applies if forced to pick one.  Like others have said, I would prefer the money early to make use of it while still able to enjoy/use it.    Also, as others have pointed out, with inflation, you would probably be better off spending your $100K now on stuff. 

The return rate is really awful, since the average person will live to 78, if you stuck your $100K in a bank account earning slightly less than 2%, you would have the same benefit over the average life span and have use/control of your money incase you get diagnoised as being terminal at age 66.  If you can get 8% (what many pensions assume :-)) you could have the same $7920 payout until your 100 - and if you die early the money is not kept by the annuity provider, but is instead part of your estate to do with as you please.

 

DavidC's picture
DavidC
Status: Silver Member (Offline)
Joined: Sep 29 2008
Posts: 243
I agree with maceves, which

I agree with maceves, which made answering the survey question, with the options given, impossible. To me, there would be no point in having one million dollars (or pounds, or whatever) if I am so infirm (assuming I am around) as to not take advantage, in the lifesstyle sense, of the amount available.

Which then takes us into the realms of should one take the deferred larger amount (assuming the exponential amount WILL get paid etc) for one's offspring? And if one has no offspring?

Dan, I hope you read the comments posted here on Chris's site!

DavidC

xkguy's picture
xkguy
Status: Bronze Member (Offline)
Joined: Jan 13 2011
Posts: 46
wasted time

I have completed both surveys and I feel I wasted my time. The first was a choice between 2 kinds of socialism if I recall correctly. This one is just weird. There is long explanation followed by a quick question. Not much of a basis given to help one understand the ramifications of the choices. I will not bother with the next survey.

As I recall there were several similarly negative comments following the first survey.

badScooter's picture
badScooter
Status: Silver Member (Offline)
Joined: Jun 20 2011
Posts: 152
xkguy wrote: I have
xkguy wrote:

I have completed both surveys and I feel I wasted my time. 

Agree with pretty much all posted here...I did not get past the third or fouth slide...my investing operating paradigm is not "blue pill" - so the whole premise was flawed in my view and not worth wasting either my time or that of the study's author with "out of bounds" answers.

Cheers,
Mike

jpitre's picture
jpitre
Status: Gold Member (Offline)
Joined: Mar 3 2009
Posts: 366
Retirement plans

 As far as I'm concerned, the right questions were not asked. I think that anyone who would believe that some government or corporation could/would honestly perform on any of these scenarios in a way that would look after one's reasonable needs in retirement is sadly mistaken. Life insurance companies promised all sorts of wonderful payoffs in the past only to scam most or all of the people they sold to - possibly excepting the ones who died prematurely.

Graphs portraying future income in any currency mean almost nothing when timeframes in excess of a few years are considered. Government inflation factors have been proven to have no validity in a real sense, so even tying income to some index fails to adequately provide assurance of being able to live comfortably in the future.

Best to hope for being able to keep your wits into old age and have the strength to look after yourself with some help from family

Jim

guardia's picture
guardia
Status: Platinum Member (Offline)
Joined: Jul 26 2009
Posts: 592
Re: offsprings
DavidC wrote:

I agree with maceves, which made answering the survey question, with the options given, impossible. To me, there would be no point in having one million dollars (or pounds, or whatever) if I am so infirm (assuming I am around) as to not take advantage, in the lifesstyle sense, of the amount available.

Which then takes us into the realms of should one take the deferred larger amount (assuming the exponential amount WILL get paid etc) for one's offspring? And if one has no offspring?

Ah ha, no, you fell in the trap  The amount you do not get because you died goes to the other guys in the plan that are still alive!

Samuel

Bytesmiths's picture
Bytesmiths
Status: Silver Member (Offline)
Joined: Apr 29 2008
Posts: 220
I'd put it in a FARM-Oh-One-Kay plan!

Anthony Schiano wrote: "From where I sit today, the $100K looks better spent on farmland and various ... ahem ... tangibles."

That's what I did with 97.8% of every penny I have.

This survey reminds me of the following: if you were orbiting the Earth in a space suit stuffed with a BILLION dollars and you had ten minutes of oxygen left, how much of that money would you have to spend to get another minute of oxygen?

The things that make life worth living are not going to be priced in fiat currency in the future.

Anthony, what did you mean with the "ahem... tangibles?" Surely, you don't think a personal stock of weapons is going to be any more useful than to make you a target of those who want weapons? That's my guess as to the "ahem" meaning.

"Tangibles" to me are the "means of production," rather than means of destruction. Like a still. No matter how bad times get, people still manage to afford alcohol -- perhaps even moreso as the times get worse. Supplying suffering people with a sedative may not be any more "moral" than supplying them with bullets at high velocity, but it somehow feels better.

 

bhami's picture
bhami
Status: Member (Offline)
Joined: Jan 20 2009
Posts: 4
Why only two extreme options?

I would choose a blended option somewhere between the two, with a slightly increasing payout.

badScooter's picture
badScooter
Status: Silver Member (Offline)
Joined: Jun 20 2011
Posts: 152
ahem?

 I'm speculating on a speculation here, Bytesmith, but isn't it possible that Anthony is using his "ahem" as a store of value, or a hedge against possible future systemic violence (i.e., "arm the farm")?  If this is the case, his "ahem" is not just an insurance policy but also could be considered undeployed capital.  I have more "ahem" than I've got the two hands for, and this is in fact part of my thinking...either for use in purchasing future favors and good will, or use in actual transaction barter with my (largely unarmed) community.

This is the way I think about it...anything that makes a good store of value, is also going to make you a "target", whether it is a suitcase full of twenties (for the time being anyway), a gold coin, or an extra firearm.  "Object of value" and "thing that makes me a target" are two different ways of saying the same thing, in my view, if you choose to advertise your possession of the thing.

I do agree in principle that it is best to deploy idle capital into assets that generate more wealth (using Dr. Martenson's "secondary tier" meaning of the term).  But not having a means to defend either your primary or secondary wealth from forcible incursion makes you not just a target, but a highly desirable "easy" target.  No thanks!

cheers,
Mike

Anne101's picture
Anne101
Status: Member (Offline)
Joined: Oct 13 2011
Posts: 5
Not a big fan, but I am

Not a big fan, but I am sure you already knew that from the other posts. :) 

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