Mortality Beliefs and Saving Decisions: The Role of Personal Experiences

Abstract

This paper is the first to non-experimentally establish a causal relationship between households’ mortality beliefs and subsequent savings and consumption decisions. Motivated by prior literature on the effect of personal experiences on individual’s expectation formation, I exploit the death of a close friend as an exogenous shock to the salience of mortality of a household. Using data from a large household panel, I find that the death of a close friend induces a significant reduction in saving rate of 1.1 percentage points which grows to 1.7 percentage points over the following 6 years. I augment the canonical consumption life-cycle model by this shock to mortality beliefs to explore how personal experiences are incorporated into the mortality belief formation process. I derive testable implications from the model and find that the empirical evidence is in line with these predictions. Furthermore, the calibrated model fits the data best for a decay parameter that is consistent with estimates from the literature. Overall, this paper provides novel insights whether and how mortality beliefs are incorporated into households’ financial planning.

Keywords: Household finance, Mortality beliefs, Belief formation, Personal experiences, Household saving, Life-cycle model

JEL Classification: D14, D15, G41, G51