YOLO: Mortality Beliefs and Household Finance Puzzles

By Rawley Z. Heimer, K. Myrseth, Raphael Schoenle. Journal of Finance, 2015

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Subjective mortality beliefs a ect pre- and post-retirement consumption and savings decisions, as well as portfolio allocation. New survey evidence shows that individuals overestimate their mortality at short horizons and survival rate at long horizons. For example, a 28 year old male with a 99.4% chance of surviving beyond 5 years believes he will do so with 92.8% probability. A 68 year old with a 71.4% probability of living to 78, believes he has a 82.4% chance of living that long. The formation of these beliefs across age cohorts can be attributed to overweighting the most salient causes-of-death, which change over the life-cycle. This bias matters empirically: Survival expectations correlate with heterogeneity in nancial education and investment behavior. Embedded in a run-of-the-mill life-cycle model, these beliefs cause the young to under-save (they have 10% less saved upon retirement) and retirees to not fully draw down their assets (they consume 12% less during retirement). In addition, for reasonable levels of risk- tolerance, the required excess rate of return on equity is in line with historical averages once subjective beliefs are accounted for.

Subfields: Accounting, Demography, General Health Professions

View Paper: https://www.semanticscholar.org/paper/1871751509a7f73c76b7daced1bf38abe9fb0176

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