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YOLO: Mortality Beliefs and Household Finance Puzzles

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  • RAWLEY Z. HEIMER
  • KRISTIAN OVE R. MYRSETH
  • RAPHAEL S. SCHOENLE

Abstract

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.

Suggested Citation

  • Rawley Z. Heimer & Kristian Ove R. Myrseth & Raphael S. Schoenle, 2019. "YOLO: Mortality Beliefs and Household Finance Puzzles," Journal of Finance, American Finance Association, vol. 74(6), pages 2957-2996, December.
    • Handle: RePEc:bla:jfinan:v:74:y:2019:i:6:p:2957-2996
    DOI: 10.1111/jofi.12828
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