Optimal Rules of Thumb for Consumption and Portfolio Choice

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.

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“…Our framework is based on Love (). Agents make decisions in discrete time, where

t = 0, 1, 2, 3, \dots T_{retire}, \dots, T

and

T_{retire}

denotes the age of retirement.…”

Section: Modeling the Life Cycle And Subjective Beliefsmentioning

confidence: 99%

YOLO: Mortality Beliefs and Household Finance Puzzles

Heimer¹,

Myrseth²,

Schoenle

2019

The Journal of Finance

164

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“…Our framework exactly follows the model of Love (2013). As such, agents live in discrete time t, where t = 0, 1, 2, 3, ...T retire , ..., T and T retire denotes the date of retirement.…”

Section: Model Setupmentioning

confidence: 99%

“…We solve the problem numerically using the method of endogenous grid-points as described in Carroll (2011) andLove (2013).…”

Section: Model Setupmentioning

confidence: 99%

“…While we refer the reader to Tables 1 and 2 in Love (2013) for details, we highlight our choices of several key parameter values, especially those relevant for the asset pricing aspect of our analysis. We thus set the risk-free rate to 2 percent, the excess return to 4 percent and the standard deviation of the risky asset to 18 percent.…”

Section: Calibrationmentioning

confidence: 99%

“…This is helped by a high risk aversion parameter of 5. Following Love (2013) and Carroll and Samwick (1997),…”

Section: Calibrationmentioning

confidence: 99%

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YOLO: Mortality Beliefs and Household Finance Puzzles

Heimer

Myrseth²,

Schoenle³

2015

Working Paper (Federal Reserve Bank of Cleveland)

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Subjective mortality beliefs affect pre-and post-retirement consumption and savings decisions, as well as portfolio allocation. New survey evidence shows that individuals overestimate their mortality at short horizons and survival rate at long horizons. For example, a 28-year-old male with a 99.4% chance of surviving beyond 5 years believes he will do so with 92.8% probability. A 68 year old with a 71.4% probability of living to 78 believes he has an 82.4% chance of living that long. The formation of these beliefs across age cohorts can be attributed to overweighting salient causes-of-death. This bias matters empirically: Survival expectations correlate with heterogeneity in fi nancial education and investment behavior. Embedded in a run-of-the-mill life-cycle model, these beliefs cause the young to under-save and retirees to not fully draw down their assets. In addition, for reasonable levels of risk-tolerance, the required excess rate of return on equity is in line with historical averages once subjective beliefs are accounted for.

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Tractable consumer choice

Friedman

Sákovics

2014

Theory Decis

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We derive a rational model of separable consumer choice which can also serve as a behavioral model. The central construct is λ, the marginal utility of money, derived from the consumer's rest-of-life problem. We present a robust approximation of λ, and show how to incorporate liquidity constraints, indivisibilities and adaptation to a changing environment. We find connections with numerous historical and recent constructs, both behavioral and neoclassical, and draw contrasts with standard partial equilibrium analysis. The result is a better grounded, more flexible and more intuitive description of consumer choice.JEL classification: D01, D03, D11.Keywords: distributed choice, moneysworth demand, value for money. * This paper supersedes the previously circulated "The marginal utility of money: a new Marshallian approach to consumer choice". We thank

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Optimal Rules of Thumb for Consumption and Portfolio Choice

Cited by 24 publications

References 69 publications

YOLO: Mortality Beliefs and Household Finance Puzzles

YOLO: Mortality Beliefs and Household Finance Puzzles

YOLO: Mortality Beliefs and Household Finance Puzzles

Tractable consumer choice

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