State-contingent markets in everything

by on January 10, 2016 at 4:14 am in Economics | Permalink

Someone is betting $40,026 on the life of a 73-year-old lottery winner in Michigan.

That amount was the highest bid Thursday in an online auction for a lottery prize that pays $1,000 a month, before taxes. But here’s the hitch: The money is paid only as long as Donald Magett stays alive.

The Portage man won the “Cash for Life” game back in 1984, although the winnings lately have been going to bankruptcy trustee Tom Richardson to pay Magett’s debts.

Richardson auctioned the lottery prize — the last main asset — in an effort to close the bankruptcy case. The auction house,, said the top bid was $40,026. At that price, Magett would need to live a few more years for the winner to at least break even.

The winner soon will get the first annual payment of $12,000.

Richardson said he doesn’t know the details about Magett’s health.

“All I know is his lawyer tells me his health is good,” Richardson said.

According to the Social Security Administration, a 73-year-old man can be expected to live another 13 years.

The story is here, via Mohamed Rayman.

1 Chris Hansen January 10, 2016 at 4:32 am

Reminds me a bit of a great anecdote from one of the greatest books ever written: The Drunkard’s Walk. A 40 year old lawyer buys an 80 year old woman’s house but agrees that he can only move in once she is dead. She outlives him.

2 critic January 10, 2016 at 7:15 am

Louise Calmet died recently at 121 or so in the south of France. Famous as oldest person ever and for having met Vincent van Gogh . Is 13 really the expectation of a 73 year old?

3 Ray Lopez January 10, 2016 at 8:55 am

Never heard of this book. Another MR commentator mentioned this is routine in France, and cited the 100+ year old lady who outlived everybody who bet she would die and they would take her property…so it’s ‘art imitating life’.

4 Stephan January 10, 2016 at 12:25 pm

It was Jeanne Calment who has the longevity record at 122 years and 164 days. From Wikipedia

“In 1965, at age 90 and with no heirs, Calment signed a deal to sell her apartment to lawyer André-François Raffray, on a contingency contract. Raffray, then aged 47 years, agreed to pay her a monthly sum of 2,500 francs until she died. Raffray ended up paying Calment the equivalent of more than $180,000, which was more than double the apartment’s value. After Raffray’s death from cancer at the age of 77, in 1995, his widow continued the payments until Calment’s death.”

5 Luciom January 11, 2016 at 5:58 am

In italy we have a common buying option called “nuda proprietà” (naked property) where the buyer buys the real estate without the cash flow claims until the death of the seller. It’s common because liquidity mortgages are very rare (and with steep interest rates for some unknown reasons). It’s been around since forever, it’s not a recent financial innovation.

6 So Much For Subtlety January 10, 2016 at 4:35 am

According to the Social Security Administration, a 73-year-old man can be expected to live another 13 years.

That is very impressive, but the question ought to be how long can a 73-year-old man in bankruptcy be expected to live? The population of bankrupts is not the same as the general population.

I would be interested to know why he was bankrupt. The obvious one is medical problems. Although some people have made a career out of these, I am not sure they are that common. However I doubt it would help. On the other hand the old get socialized medicine so maybe it would matter. As long as he is not a veteran.

Alcohol or substance abuse? Bankruptcy could help there. I can’t see him robbing convenience stores or walking the streets in suspenders for a fix. But you never know.

Divorce? At that age, I would hope not.

Gambling is the interesting one. Because a gambler who can’t quit could make this interesting.

The bidder here needs him to survive four years? Seems he got a bargain.

7 rayward January 10, 2016 at 7:25 am

Life expectancy tables aren’t what people believe them to be. For example, someone age 73 is expected to live 14.8 years, someone age 88 is expected to live 6.3 years, and someone age 100 is expected to live 2.9 years. [These are from the IRS single life expectancy tables for males.] How can someone age 87.8 (73 plus 14.8) be expected to live another 6.3 years when he was supposed to be dead at age 88? By the way, someone age 66 (the social security full benefits age for today’s nearly old) is expected to live another 20.2 years. Of course, he won’t – the median age at death for males is a little less than 80.

8 Gochujang January 10, 2016 at 7:45 am

The median life expectancy for males includes those with bad habits. The group that make 66 have fewer bad habits (etc) and thus have better prospects.

9 Brian Donohue January 10, 2016 at 9:03 am

It’s less complicated than that. Conditional probability.

10 Gochujang January 10, 2016 at 10:17 am


11 Chris Hansen January 10, 2016 at 5:39 pm

Sort of knowing what conditional probability is is one of the reasons I put The Drunkard’s Walk on my best books list.

12 i hope this was a joke January 10, 2016 at 12:23 pm

In the category of Innumerate Post of the Year, our nominees are…

13 Brian Donohue January 10, 2016 at 9:07 am

Yeah, but this looks like a really good deal for the person who bought the payments.

You would think this person would be willing to spend some portion of the $1,000 per month on keeping the guy alive.

More generally, old people with fat annuity payments can come to be seen as “cash cows” by relatives, health care providers, etc.

Incentives matter.

14 Mark Thorson January 10, 2016 at 11:23 am

I was just thinking what if this guy gets Alzheimer’s disease? The quality of care makes a big difference. Alzheimer’s does not kill directly, it’s usually complications from Alzheimer’s. A major cause of death is pneumonia subsequent to food going down the windpipe. Good quality staff can prevent that from happening. On the other hand, the difference between good and lousy care may easily exceed $12,000 per year.

If the guy is healthy now, insurance may be available that would cover this and cost less than $12,000 per year.

15 mulp January 10, 2016 at 11:29 am

He is bankrupt because he’s a criminal who defrauded his employees and the government and has had to repay all the funds he stole plus pay taxes due for those employees that he failed to pay, plus taxes on the income he enjoyed from his theft.

He is a retired Michigan police officer who probably has a generous Michigan pension which the conservative Republican governor protected while attacking the public pensions of all other government workers.

As he is a criminal, he’s prohibited from buying guns, reducing the odds of effecting his own suicide.

16 rayward January 10, 2016 at 8:18 am

A tontine (named after banker Lorenzo de Tonti who invented it) was an ingenious method used to raise capital in the 17th, 18th, and 19th centuries, pursuant to which investors contributed to a fund, receiving in return an annuity dependent on the amount in the fund and the other investors who survive, with investors who survive the longest receiving the greater return. Who knows what evil lurks in the hearts of men. Tontine may be illegal today, but it highlights the allure of the life insurance business to the hucksters who dominate it. As reflected in my prior comment on the life expectancy tables, someone of any age (100, 105, 110) has a life expectancy that extends well beyond the median age of death. That means if I organize a new life insurance company and sell lots of policies to old men, my profits in the early years will be enormous because the life expectancy of those old men extends well into the future, even though the profits will disappear as the years go by, not a particularly great concern for the owners of the life insurance business who withdraw all those enormous profits in the early years. That is the life cycle of many life insurance schemes of the hucksters, I mean entrepreneurs, who dominate the life insurance industry. Lorenzo lives!

17 TheObeseDog January 10, 2016 at 8:37 am

This comment does not mesh at all with how life insurance is actually priced in the market. Do you honestly believe that insurers are making huge dollars by writing policies to the elderly? (Hint: they aren’t). Issuing insurance policies can be expensive: medical underwriting, policy issue, commissions. It takes a while to break even. Life insurance is a very competitive market. There are no easy profits to be had.

Sounds like you need a crash course in statistics. Life expectancy tables are exactly what they should be: conditional probabilities.

18 Yancey Ward January 10, 2016 at 11:52 am

Fat Dog, you are wasting your time.

19 Matías Espinosa January 13, 2016 at 1:16 pm

“(…) if I organize a new life insurance company and sell lots of policies to old men, my profits in the early years will be enormous because the life expectancy of those old men extends well into the future”

What? Do you realize that the marginal life expectancy decreases as the person grows older*? What you would need is to find out which people are going to live the longest when they are still young, and if there were any methods to do that without risk, well, insurance wouldn’t be a business in the first place. If you think you’ve discovered something “hiding” in plain sight, then it is more likely for you to be an idiot missing something important than a genius starting a revolution.


20 Todd Kreider January 10, 2016 at 9:59 am

But a 73 year old is likely to live just 13 years doesn’t factor in the coming health pills that are widely believed by top longevity expert to be on the market between 2016 and 2020. It isn’t clear how long they are expected to extend healthy life, but a common answer given is over 7 years,

A much more realistic assumption in 2016 is that a typical healthy 73 year old will be expected to live not 13 years but closer to 18 or 19 years – out to 2035.

Of course this assumes no further advances in health pills or medical technology after the coming wave, which is what has become known in the longevity field as the “Cowen error.”

There is always the chance of dying from an accident or nuclear war but the man is likely to live past 100 at which time he would have access to pharmaceutical and other medical technology of 2042.

21 TheObeseDog January 10, 2016 at 10:16 am

I’m not familiar with the data you cite but 7 years of life extensions seems wildly optimistic. At advanced ages there are enough causes of mortality that you would have eliminate something like heart disease or cancer completely to get that type of improvement.

22 Todd Kreider January 10, 2016 at 10:54 am

Yes, the coming health pills are expected to significantly reduce diabetes, stroke, heart disease and cancer.

I picked seven years because that is the low end of the estimates I’ve seen the researches discuss to the press.. As for the timing of the coming health pills, I again picked an average range starting from what the researchers said between 2009 and 2012. I recently shifted this up to 2016 to 2020 based on statements made by longevity experts in the past couple of years. Proctor & Gamble is about to sell NR (a type of vitamin B3) in products this year, which will likely have an effect but not sure how that translated into increased longevity so am not including this.

Assuming 7 years is the average healthy extension for the first wave of health pills, it wouldn’t mean an 88 year old would suddenly add 7 years to the current life expectancy but I assumed 73 is still young enough to capture about that benefit, on average.

This has been widely reported, especially in the pat two years, but so far I’ve found social scientists completely ignore this coming health shift, even in my area of interest Japan, with its famously aging society. I think one reason is that social scientists usually don’t follow natural science, and this is especially when it is diametrically opposed to their research. Instead they assume no change out to 2050. The CBO has gone out to 2080 doing the same thing.


23 Curt F. January 10, 2016 at 2:30 pm

I am a natural scientist and I am also completely ignoring the coming health shift that you speak of.

To me, the fact that you refer to them as “health pills” instead of “lovastatin pills” or “streptomycin pills” or “XYZ pills” suggests that you don’t really follow the natural sciences that closely either.

24 Todd Kreider January 10, 2016 at 2:56 pm

My science background is in physics, and I admit to having poor knowledge of biochemistry. But I do read what the biologists and chemists are saying in interviews and on blogs. I call them health pills because the common term in the press, “anti-aging pills”, doesn’t seem quite right yet and there are different types of pills already out and in development. Any pill that extends healthy life several years and cuts the risk of the major diseases looks like a health pill to me.

So why are you ignoring this coming health shift? I’m curious. It is of course much easier to dismiss something outright than form an intelligent argument against it.

25 msgkings January 10, 2016 at 3:56 pm

@Todd: maybe instead of just asserting this “health pill” thing as if it’s a done deal, maybe you could provide some links to back up your claim. You are the one making the fairly extraordinary claim. Other than spam, I never see the press discussing this easy way for everyone to live longer.

26 Todd Kreider January 10, 2016 at 7:54 pm

David Sinclair, “NPR Science Friday,” 2013: “The time-frame forward typically from here (SRT pill in phase I) on is about five years if things go well. [2018] But, you know, we have to be cautious because things can go wrong, and they often do in drug development. But, you know, we’re certainly a lot closer than I ever thought we would be in my lifetime, and I certainly never thought that I’d be seeing patients given a drug that came out of the aging field so quickly.”

David Sinclair, “Chicago Ideas Week,” 2014: “We cannot only live longer than 30,000 days but live healthier and much more productive lives and compress the last stage of our lives, the morbid stage, into a few weeks. Sounds crazy right? But scientists such as myself are doing this around the world all the time in laboratories in model organisms like mice and rats and even monkeys. So it’s not crazy – it’s just a matter of how soon this will happen, and we’re very, very close. Let me tell you how close we are… at around 10:55 Sinclair discusus the NMN/NAD+ approach and says trials begin in 2015.” [Some trials of NR, similar to NMN, have been completed with several other due soon].” There is now a world wide effort to slow down aging and to improve health..”

(The Washington Post interviewed Sinclair in August 2015)

Matt Kaeberlein, Bloomberg, 2015: “People have shown that rapamycin extends life span again and again and again,” says Matt Kaeberlein, a scientist at the University of Washington and a leading researcher in the biology of aging. So far it’s demonstrated it can lengthen the lives of mice, not men, but what’s particularly exciting is how it did so, Kaeberlein says. The drug appears to delay “age-related decline in multiple different organ systems, which is something we would expect if we were fundamentally slowing the aging process.”

Leonard Guarente, founder of Elysium,which sells NR along with the blueberry extract pterolstibine,said in an interview around 2010 that he thought a pharmaceutical would be available within ten years, or by 2020. He said in an interview two years ago he didn’t want to wait so started taking NR and resveratrol along with vitamin D and then founded Elysium with six Nobel laureates soon on the advisory board. (P&G will be competing this year through a deal with the sole supplier of NR, ChromaDex.)

Brian Kennedy , The Buck Institute, said on an interview or “Science TV” that he expected different types of these pills will be competing in the 2010s.

A “Nature News” article, June 2015, on getting FDA approval to have a large trial of elderly to take metformin, which no longer is under patent protection.

27 AlephOne January 10, 2016 at 11:20 am

The UK government is introducing a secondary market in annuities from 2017:

The requirement that people must buy an annuity with their pension pot has already been removed. The upcoming changes will mean that those who’d already bought an annuity can also draw down an income instead (or spend it all at once if they prefer).

28 Tim January 10, 2016 at 12:03 pm

Note that the lottery will only pay the annuity if it receives annual confirmations that the winner is still alive, and they have to be signed by the original winner.

I’m guessing that will be an expensive signature.

29 John January 10, 2016 at 10:47 pm

That’s the real catch. I looked into this because the deal is pretty good on the surface. He was a police officer who retired and started a security company. The bankruptcy comes from swindling in that endeavor. I was going to put in the minimum bid because when I looked there was only the required minimum. Then I stared to read the documents and saw he had to file annual confirmations which the bankruptcy lawyer even stated he would be unlikely to do. So if his filings cost you half the money its a down right crappy deal.

30 T. Shaw January 10, 2016 at 2:10 pm

Here, the investor bets on the subject enjoying a long life. Other investment options saw gains on earlier deaths. That seems somewhat ghoulish.

Senior Life Settlements (SLS) are transactions in which individuals, generally between 65 and 79 years of age (Senior), “sell:” life insurance policies to third-party investors, usually through brokers, for amounts less than the policies’ face value, but greater than the net cash surrender values. The investors became responsible for paying future premiums and, upon the death of the Senior, received the policies’ death benefits.
In cases where the subjects lived longer, investor losses were incurred.

In addition to longevity risk, investors face a number of other risks.

31 So Much For Subtlety January 10, 2016 at 5:49 pm

The interesting story is the one next to that in the Detroit Free Press that says that water is being distributed door-to-door in Flint – by the police.

Yep. That is what years of Democrat administration will get you. The water supply doesn’t just come when you turn on a tap. It needs an armed police escort.

32 Moo cow January 11, 2016 at 10:47 am

You can thank Gov. Snyder for that one. He will be somewhat surprised to learn he’s a Democrat.

33 Tom G January 10, 2016 at 8:31 pm

“life expectancy” should more often be expected number of years of life — for a 50, 60, 70, 80, 90 year old.
73 + 13 exp yrs is around 86. My grandfather died at that age …

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