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A parsimonious model of subjective life expectancy

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  • Alexander Ludwig
  • Alexander Zimper

Abstract

This paper develops a theoretical model for the formation of subjective beliefs on individual survival expectations. Data from the Health and Retirement Study (HRS) indicate that, on average, young respondents underestimate their true survival probability whereas old respondents overestimate their survival probability. Such subjective beliefs violate the rational expectations paradigm and are also not in line with the predictions of the rational Bayesian learning paradigm. We therefore introduce a model of Bayesian learning which combines rational learning with the possibility that the interpretation of new information is prone to psychological attitudes. We estimate the parameters of our theoretical model by pooling the HRS data. Despite a parsimonious parametrization we find that our model results in a remarkable fit to the average subjective beliefs expressed in the data.

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Bibliographic Info

Paper provided by Economic Research Southern Africa in its series Working Papers with number 74.

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Date of creation: 2008
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Handle: RePEc:rza:wpaper:74

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Keywords: subjective survival expectations; ambiguity; Bayesian learning;

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References

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Citations

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Cited by:
  1. Alexander Ludwig & Alexander Zimper, 2013. "A decision-theoretic model of asset-price underreaction and overreaction to dividend news," Annals of Finance, Springer, Springer, vol. 9(4), pages 625-665, November.
  2. De Donder Philippe & Leroux Marie-Louise, 2013. "Behavioral Biases and Long-Term Care Insurance: A Political Economy Approach," The B.E. Journal of Economic Analysis & Policy, De Gruyter, De Gruyter, vol. 14(2), pages 551-575, May.
  3. De Donder, Philippe & Leroux, Marie-Louise, 2012. "Behavioral Biases and Long Term Care Annuities: A Political Economy Approach," TSE Working Papers, Toulouse School of Economics (TSE) 12-352, Toulouse School of Economics (TSE), revised Feb 2013.
  4. Alexander Zimper & Alexander Ludwig & Max Groneck, 2012. "A Life-Cycle Consumption Model with Ambiguous Survival Beliefs," 2012 Meeting Papers, Society for Economic Dynamics 693, Society for Economic Dynamics.
  5. Juergen Jung, 2008. "Subjective Health Expectations," Caepr Working Papers, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington 2008-016, Center for Applied Economics and Policy Research, Economics Department, Indiana University Bloomington.
  6. d'Albis, Hippolyte & Thibault, Emmanuel, 2012. "Ambiguous Life Expectancy and the Demand for Annuities," TSE Working Papers, Toulouse School of Economics (TSE) 12-323, Toulouse School of Economics (TSE).
  7. Groneck, Max & Ludwig, Alexander & Zimper, Alexander, 2013. "A Life-Cycle Model with Ambiguous Survival Beliefs," MEA discussion paper series, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy 13270, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
  8. Nicolas Drouhin, 2012. "A rank-dependent utility model of uncertain lifetime, time consistency and life insurance," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-00748662, HAL.
  9. John Beshears & James Choi & David Laibson & Brigitte C. Madrian & Stephen P. Zeldes, 2012. "What Makes Annuitization More Appealing?," NBER Chapters, in: Retirement Benefits for State and Local Employees: Designing Pension Plans for the Twenty-First Century National Bureau of Economic Research, Inc.
  10. Leroux, M.-L. & Pestieau, P. & Ponthiere, G., 2011. "Longevity, genes and efforts: An optimal taxation approach to prevention," Journal of Health Economics, Elsevier, Elsevier, vol. 30(1), pages 62-76, January.
  11. repec:hal:journl:halshs-00721281 is not listed on IDEAS
  12. repec:hal:wpaper:halshs-00748662 is not listed on IDEAS

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