Overview of the Issue

Abstract

This issue features two original research articles, three issues & policy articles and a book review section. The lead article is by Geoffrey Kingston and Susan Thorp (University of New South Wales, Australia) and addresses the issue of Annuitization and asset allocation with HARA utility. One of the puzzles in retirement economics is why individuals do not choose to purchase annuities and Kingston and Thorp explore in detail a real options model in which individual preferences obey the broad class of hyperbolic absolute risk aversion utility. The theory of Real Options argues that people might want to delay annuitisation at relatively younger ages because the price of life annuities might improve and annuitisation is irreversible. However, Kingston and Thorp show that the implications of a Real Options approach varies across individuals considerably. For example, when individuals have a desired consumption floor as opposed to CRRA preferences, they are more likely to want to purchase annuities earlier than later. It would be interesting to see empirical tests done in this area to test the relatively new Real Options theory as it applies to irreversible personal financial decisions, such as annuitization.