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Ambiguous Survival Beliefs and Hyperbolic Discounting in a Life-Cycle Model

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  • Groneck, Max
  • Ludwig, Alexander
  • Zimper, Alexander

Abstract

On average, young people underestimate whereas old people overestimate their chances to survive into the future. We employ a subjective survival belief model proposed by Ludwig and Zimper (2013), which can replicate these patterns. The model is compared with hyperbolic discounting within a standard life-cycle setting of consumption and savings. We show theoretically that the first order conditions of our ambiguous survival belief model closely resemble the generalized Euler-equation from the hyperbolic discounting model with an additional adjustment factor. In the numerical section it is shown that the subjective survival belief model simultaneously leads to undersaving at younger ages and high asset holdings and little dissaving of the elderly. The model can thus replicate two important empirical facts of the life-cycle literature at once which is not possible with a hyperbolic discounting model.

Suggested Citation

  • Groneck, Max & Ludwig, Alexander & Zimper, Alexander, 2013. "Ambiguous Survival Beliefs and Hyperbolic Discounting in a Life-Cycle Model," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 79878, Verein für Socialpolitik / German Economic Association.
  • Handle: RePEc:zbw:vfsc13:79878
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    References listed on IDEAS

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    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness

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