YOLO: Mortality Beliefs and Household Finance Puzzles

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: 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