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A Parsimonious Model of Subjective Life Expectancy

Listed author(s):
  • Ludwig, Alexander

    ()

    (Mannheim Research Institute for the Economics of Aging (MEA) and Sonderforschungsbereich 504)

  • Zimper, Alexander

    ()

    (Sonderforschungsbereich 504)

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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File URL: http://www.sfb504.uni-mannheim.de/publications/dp07-65.pdf
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Paper provided by Sonderforschungsbereich 504, Universität Mannheim & Sonderforschungsbereich 504, University of Mannheim in its series Sonderforschungsbereich 504 Publications with number 07-65.

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Length: 33 pages
Date of creation: 07 Nov 2007
Handle: RePEc:xrs:sfbmaa:07-65
Note: We thank Axel Börsch-Supan, Andrew Caplin, Mike Hurd, Jürgen Maurer, Susan Rohwedder,
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