Mortality Beliefs and Saving Decisions: The Role of Personal Experiences

48 Pages Posted: 15 Apr 2022

Date Written: April 3, 2022

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

Suggested Citation

Horn, Frederik, Mortality Beliefs and Saving Decisions: The Role of Personal Experiences (April 3, 2022). Available at SSRN: https://ssrn.com/abstract=4073902 or http://dx.doi.org/10.2139/ssrn.4073902

Frederik Horn (Contact Author)

University of Mannheim ( email )

L 7, 3-5
Mannheim, 68161
Germany

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