Cognition, Optimism and the Formation of Age-Dependent Survival Beliefs

Abstract

This research is motivated by the classical economic question of how economic decisions over the life-cycle are affected by time preferences as well as the time horizon of individuals. Specifically, we focus on how individuals form their survival belief expectations. According to numerous empirical studies young people underestimate whereas older people overestimate their survival chances on average. What is driving these age-dependent patterns of survival belief biases on top of any statistical learning process that may take place over an individual's life-cycle? This paper argues that psychological factors are of key relevance for answering this question. We compare subjective survival beliefs with objective survival probabilities that we estimate based on individual level characteristics. We document that the typical biases emerge: up to age 70 individuals underestimate their objective survival chances, beyond that age they overestimate them, on average. To show that psychological attitudes are important determinants of these deviations between subjective survival beliefs and objective survival probabilities, we estimate implicit psychological factors from the observed differences. We show that both the implied measure of pessimism and of insensitivity to objective likelihood are increasing with age. We next show that direct measures of these psychological factors share these trends: data indices on pessimism are increasing and on optimism are decreasing in age and an index of cognitive weakness is increasing with age. Finally, we show that these direct psychological measures indeed play important quantitative roles in the formation of subjective survival beliefs. Pessimism leads to a significant underestimation, optimism to an overestimation of survival chances and lack of cognition plays an increasingly important role for the observed overestimation of survival chances as individuals grow older.We conclude our analysis with an outlook that argues that the effects of the driving forces for biases in beliefs on economic decisions can only be studied by use of structural life-cycle models that enable researchers to explicitly take into account multiple risks and how expectations about these risks are influenced by psychological factors.Electronic copy available at: https://ssrn.com/abstract=3124791Cognition, Optimism and the Formation of Age-Dependent Survival Beliefs *This paper investigates the roles psychological biases play in empirically estimated deviations between subjective survival beliefs (SSBs) and objective survival probabilities (OSPs). We model deviations between SSBs and OSPs through age-dependent inverse S-shaped probability weighting functions (PWFs), as documented in experimental prospect theory. Our estimates suggest that the implied measures for cognitive weakness, likelihood insensitivity, and those for motivational biases, relative pessimism, increase with age. We document that direct measures of cognitive weakness and motivational attitudes share these trends. Our regression analyses con...