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 saving and consumption decisions. Motivated by prior literature on the effect of personal experiences on individuals’ 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 2.2 percentage points which persist over the following 5 years. I augment the life-cycle model of consumption by the experienced-based learning model and quantify the impact of this personal experience on mortality beliefs. Even though the shock has no material impact on a household’s situation, I find a quantitatively large initial reduction in expected survival probability of around 4 percent.

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

JEL Classification: D14, D15, G41, G51