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

Abstract

This paper investigates the roles psychological biases play in 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. Our estimates suggest that implied measures for cognitive weakness increase and relative optimism decrease with age. We document that direct measures of cognitive weakness and optimism share these trends. Our regression analyses confirm that these factors play strong quantitative roles in the formation of subjective survival beliefs. Our main finding is that cognitive weakness rather than optimism is an increasingly important contributor to the well-documented overestimation of survival chances in old age.JEL Classification: D83, D91, I10.