YOLO: Mortality Beliefs and Household Finance Puzzles

72 Pages Posted: 7 Oct 2015 Last revised: 2 Apr 2020

See all articles by Rawley Heimer

Rawley Heimer

Boston College - Department of Finance

Kristian Ove R. Myrseth

University of York

Raphael Schoenle

Brandeis University

Date Written: June 1, 2018

Abstract

We study the effect of subjective mortality beliefs on life-cycle behavior. With new survey evidence, we document that survival is underestimated by the young and overestimated by the old. We calibrate a canonical life-cycle model to elicited beliefs. Relative to calibrations using actuarial probabilities, the young under-save by 26%, and retirees draw down their assets 27% slower, while the model’s fit to consumption data improves by 88%. Cross-sectional regressions support the model's predictions: distorted mortality beliefs correlate with savings behavior while controlling for risk preferences, cognitive, and socioeconomic factors. Overweighting the likelihood of rare events contributes to mortality belief distortions.

Keywords: Subjective beliefs, Savings and consumption decisions, Life cycle model, Household finance, Discount factors, Salience

JEL Classification: D14, G02, G11

Suggested Citation

Heimer, Rawley and Myrseth, Kristian Ove R. and Schoenle, Raphael, YOLO: Mortality Beliefs and Household Finance Puzzles (June 1, 2018). Journal of Finance, (2019) 74(6): 2957-2996.; FRB of Cleveland Working Paper No. 15-21. Available at SSRN: https://ssrn.com/abstract=2669484 or http://dx.doi.org/10.2139/ssrn.2669484

Rawley Heimer

Boston College - Department of Finance ( email )

Carroll School of Management
140 Commonwealth Avenue
Chestnut Hill, MA 02467-3808
United States

Kristian Ove R. Myrseth (Contact Author)

University of York ( email )

Sally Baldwin Buildings
Heslington
York, North Yorkshire YO10 5DD
United Kingdom

Raphael Schoenle

Brandeis University ( email )

Waltham, MA 02454
United States

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