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The Impact of Biases in Survival Beliefs on Savings Behavior

60 Pages Posted: 31 Mar 2017  

Max Groneck

Stockholm School of Economics, Department of Economics

Alexander Ludwig

Goethe University Frankfurt - Research Center SAFE; University of Cologne - Faculty of Management, Economics and Social Sciences

Alexander Zimper

University of Pretoria; Kiel Institute for the World Economy

Date Written: March 24, 2017

Abstract

On average young people "undersave" whereas old people "oversave" with respect to the rational expectations model of life-cycle consumption and savings. According to numerous studies on subjective survival beliefs, young people also "underestimate" whereas old people "overestimate" their objective survival chances on average. We take a structural behavioral economics approach to jointly address both empirical phenomena by embedding subjective survival beliefs that are consistent with these biases into a rank-dependent utility (RDU) model over life-cycle consumption. The resulting consumption behavior is dynamically inconsistent. Considering both naive and sophisticated RDU agents we show that within this framework underestimation of young age and overestimation of old age survival probabilities may (but need not) give rise to the joint occurrence of undersaving and oversaving. In contrast to this RDU model, the familiar quasi-hyperbolic discounting (QHD), which is nested as a special case, cannot generate oversaving.

Keywords: saving puzzles, subjective survival beliefs, behavioral economics, prospect theory, neo-additive probability weighting, dynamic inconsistency, sophisticated versus naive behavior, quasi-hyperbolic discounting

JEL Classification: D91, D83, E21

Suggested Citation

Groneck, Max and Ludwig, Alexander and Zimper, Alexander, The Impact of Biases in Survival Beliefs on Savings Behavior (March 24, 2017). SAFE Working Paper No. 169. Available at SSRN: https://ssrn.com/abstract=2943885 or http://dx.doi.org/10.2139/ssrn.2943885

Max Groneck

Stockholm School of Economics, Department of Economics ( email )

Germany

HOME PAGE: http://https://www.hhs.se/en/Research/Departments/DE/

Alexander Ludwig (Contact Author)

Goethe University Frankfurt - Research Center SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

University of Cologne - Faculty of Management, Economics and Social Sciences ( email )

Albertus-Magnus-Platz
Cologne, D-50923
Germany

HOME PAGE: http://www.wiso.uni-koeln.de/cmr/alexludwig

Alexander Zimper

University of Pretoria ( email )

South Africa

Kiel Institute for the World Economy ( email )

P.O. Box 4309
Kiel, D-24100
Germany

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