YOLO: Mortality Beliefs and Household Finance Puzzles
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 financial 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.
Heimer, Rawley Z., Kristian Ove R. Myrseth, and Raphael S. Schoenle. 2015. “YOLO: Mortality Beliefs and Household Finance Puzzles” Federal Reserve Bank of Cleveland, Working Paper No. 15-21. https://doi.org/10.26509/frbc-wp-201521