The Impact of Biases in Survival Beliefs on Savings Behavior

Abstract

How households consume and save over the life-cycle and how time preferences as well as the time horizon affect these decisions are classical economic questions. According to numerous studies on subjective survival beliefs, young people (younger than about 65) underestimate whereas old (older than about 70) people overestimate their survival chances on average. Another phenomenon is that, on average, young people undersave whereas old people oversave and hold on to their assets too long in life when compared to the optimal behavior under rational survival expectations. Hence, relative to this rational benchmark, the data on actual savings behavior are "puzzling".Intuitively, one would conjecture that the observed age-dependent biases between perceived and objective survival chances are an important explanation for these saving puzzles. The reason is that individuals who do not expect to live for long will consume in the present rather than save for the future to the effect that underestimation of survival chances at young age should give rise to undersaving early in life. Conversely, overestimation of survival chances at an old age should lead to oversaving later in life, so that individuals also hold on to their assets until too late in life.The main objective of our paper is to develop an economic theory based on a life-cycle model with biased survival beliefs to investigate whether this conjecture is correct. We show that biased beliefs may, but need not necessarily, resolve the saving puzzles. While overestimation of survival beliefs in old-age induces households to save more than they would under rational survival beliefs, this oversaving must be sufficiently pronounced so that also the old-age stock of asset holdings exceeds the respective asset holdings under rational expectations. At the same time, with forward looking behavior, this overestimation should not be too pronounced because otherwise the optimizing households would anticipate this overestimation at old-age and rather undersave at a young age.Electronic copy available at: https://ssrn.com/abstract=2943885 Abstract On average young people "undersave" whereas old people "oversave" with respect to the rational expectations model of life-cycle consumption and savings. According to numerous studies on subjective survival beliefs, young people also "underestimate" whereas old people "overestimate" their objective survival chances on average. We take a structural behavioral economics approach to jointly address both empirical phenomena by embedding subjective survival beliefs that are consistent with these biases into a rank-dependent utility (RDU) model over life-cycle consumption. The resulting consumption behavior is dynamically inconsistent. Considering both naive and sophisticated RDU agents we show that within this framework underestimation of young age and overestimation of old age survival probabilities may (but need not) give rise to the joint occurrence of undersaving and oversaving. In contrast to this RDU model, the familiar quasi-hyperbol...

Biased Survival Expectations and Behaviours: Does Domain Specific Information Matter?

“…Although some studies document the presence of discrepancies between perceived and realized survival, there is limited, or no consensus on the effect of BSE on actual behaviour. Groneck et al, (2017) find no evidence that biased survival expectations affect financial behaviours. In contrast, other studies identify an effect of survival expectations on retirement (O'Donnell et al, 2008;van der Klaauw & Wolpin, 2008), demand for annuities (Schulze & Post, 2010;Teppa & Lafourcade, 2013), portfolio allocation (Kézdi & Willis, 2011), education (Arcidiacono et al, 2012), migration (McKenzie et al, 2013, savings (Bloom et al, 2006) and smoking behaviour (Balia, 2011).…”

“…All of the latter explain why people differ in their ability to judge their own mortality risk (Lichtenstein et al, 1978). Younger respondents tend, on average, to underestimate their objective survival chances, and the opposite is true for older people (Groneck et al, 2017). Similarity, gender plays a role, though according to Steffen (2009) both men and women underestimate their survival, and Teppa and Lafourcade (2013) estimate that women exhibit a systematic lower subjective survival probability relative to actuarial survival probabilities.…”

“…5 So far, most of the literature examines how survival expectations are modified by changes in health behaviours(Smith et al, 2001), genetic information(Hurd and McGarry, 1995;Perozek, 2008), better knowledge of parents' health(van Doorn & Kasl, 1998) and health-related experiences in life(Benítez- Silva, 2008;Costa-Font & Costa-Font, 2011). Previous evidence supports the idea that subjective survival expectations are accurate predictors of longevity(Hurd & McGarry, 1995.6 For instance,Salm (2010) found that a 1% higher subjective mortality rate was associated with an annual decrease in consumption of non-durable goods of 1.8% Groneck et al (2017). claim that underestimation of young age and overestimation of old age survival probabilities might give rise to the occurrence of over and under saving, respectively.…”

Assisted savings for retirement: An experimental analysis

“…Moreover, high credit card, housing, and student loan debts might be driven by speculative motivations (housing) or visceral "gut" motives (credit card purchases), which are not present in standard laboratory experiments, with the exception of Brown et al (2009) who used payoffs in terms of soda drinks. Third, Groneck et al (2017) find evidence for misperceived survival rates in that young people save too little because they underestimate how long they will live. In contrast, the old overestimate how much time they have left to live, and consequentially oversave.…”