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YOLO: Mortality Beliefs and Household Finance Puzzles
Author(s) -
HEIMER RAWLEY Z.,
MYRSETH KRISTIAN OVE R.,
SCHOENLE RAPHAEL S.
Publication year - 2019
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.12828
Subject(s) - socioeconomic status , consumption (sociology) , survey data collection , demography , psychology , cognition , econometrics , economics , actuarial science , statistics , sociology , psychiatry , mathematics , social science , population
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.