YOLO: Mortality Beliefs and Household Finance Puzzles

Abstract

We study the effect of subjective mortality beliefs on life‐cycle behavior. With new survey evidence, we document that survival is underestimated (overestimated) by the young (old). We calibrate a canonical life‐cycle model to elicited beliefs. Relative to calibrations using actuarial probabilities, the young undersave by 26%, and retirees draw down their assets 27% slower, while the model's fit to consumption data improves by 88%. Cross‐sectional regressions support the model's predictions: Distorted mortality beliefs correlate with savings behavior while controlling for risk preferences, cognitive, and socioeconomic factors. Overweighting the likelihood of rare events contributes to mortality belief distortions.

Dynamic Decisions Under Subjective Expectations: A Structural Analysis

“…Moreover, the recent literature documented violations of perfect expectations by comparing survey data on agents' subjective expectations with the objective counterpart; and such violations often have a great impact on agents' choices. For example , Heimer, Myrseth, and Schoenle (2017) show that surveyed mortality beliefs over the life cycle substantially differ from actuarial statistics from the Social Security administration; this discrepancy leads to 30% under-saving by the young and 15% more slow drawing down of assets by retirees. Cruces, Perez-Truglia, and Tetaz (2013) also provide evidence of agents' biased perception of the income distribution.…”

“…Such an assumption may be problematic, as Manski (1993a) pointed out that the observed choices can be consistent with multiple combinations of expectations and preferences. Moreover, some recent studies have documented systematic discrepancies between subjective and rational expectations by comparing survey data on agents' subjective beliefs with the objective counterparts (see e.g., Heimer, Myrseth, and Schoenle (2017) and Cruces, Perez-Truglia, and Tetaz (2013) among others). Not surprisingly, violation of the rational expectations assumption may induce biased estimation of agents' preferences and misleading counterfactual results.…”

When Saving Is Not Enough – The Wealth Decumulation Decision in Retirement

“…In our sample, more optimistic individuals are willing to decumulate roughly 4 % more of their savings compared to rather pessimistic individuals (as defined by being one standard deviation away from the mean). While this difference is hardly decisive for living retirement in luxury or in poverty, it might benefit those retirees who systematically overestimate their life expectancy (Heimer, Myrseth, & Schoenle, 2019). Yet, similar to earlier findings on optimism, we also report strikingly different results for individuals who are overly optimistic.…”

Measuring subjective survival expectations – Do response scales matter?

“…However, while survival expectations play an important role in structural models of saving decisions, relatively few papers incorporate subjective beliefs in life cycle models of labor supply and saving. Notable exceptions include the models of saving presented in Heimer et al (2018), Wu et al (2015) and Gan et al (2015) and that of saving and labor supply in Van der Klaauw and Wolpin (2008). Researchers typically equate subjective longevity to actuarial forecasts, despite the robust finding that such figures are poor proxies even for average expectations (Bissonnette et al, 2017;Perozek, 2008).…”