YOLO: Mortality Beliefs and Household Finance Puzzles
71 Pages Posted: 7 Oct 2015 Last revised: 13 Apr 2018
Date Written: March 2018
Subjective mortality beliefs contribute to contradictory savings rate puzzles at opposite ends of the life-cycle – the young under-save, and retirees dis-save too slowly. We calibrate a canonical life-cycle model to new data from a large survey on subjective survival beliefs. Relative to a benchmark calibration using actuarial transition probabilities, the young under-save by 30%, and retirees draw down their assets 34% slower. The data supports the model’s predictions: distorted mortality beliefs correlate with savings behavior, even after controlling for risk preferences, cognitive, and socioeconomic factors. The salience of causes-of-death is a pivotal source of mortality belief distortions over the life-cycle.
Keywords: Subjective beliefs, Savings and consumption decisions, Life cycle model, Household finance, Discount factors, Salience
JEL Classification: D14, G02, G11
Suggested Citation: Suggested Citation