YOLO: Can Subjective Life-Expectancies Explain Household Investment Puzzles?

Rawley Heimer, Kristian Ove R. Myrseth, Raphael Schoenle
2015 Social Science Research Network  
Subjective mortality beliefs affect pre-and post-retirement consumption and savings decisions, as well as portfolio allocation. Our new survey evidence shows that younger individuals overestimate their mortality at short horizons while older individuals overestimate their long-run chances of survival. 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
more » ... ctations correlate with heterogeneity in financial education and investment behavior. These beliefs make the young (old) more impatient (patient), and when embedded in a conventional dynamic life-cycle model with pre-cautionary savings, they 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, we propose a few mechanisms through which mortality beliefs could affect the equity premium, particularly through a reduction in the risk free rate.
doi:10.2139/ssrn.2669484 fatcat:xd5hqz6clvcrvh73hkw4ym3gt4