Mortality Beliefs and Household Finance Puzzles

Subjective mortality beliefs influence individual discount rates, affecting savings rates preand post-retirement. New survey evidence indicates that the salience of cohort-specific causes-ofdeath causes younger individuals to overestimate mortality, and elderly individuals to overestimate survival probabilities. These distorted mortality beliefs correlate with savings behavior, even controlling for cognitive and socioeconomic factors. We embed an estimated survival belief function into a canonical life-cycle model. Relative to a benchmark model using actuarial transition probabilities, the young under-save (31% lower retirement savings), and retirees draw down their assets more slowly (14% lower retirement consumption), reconciling contradictory savings puzzles at opposite ends of the life-cycle. ∗Heimer is at the Federal Reserve Bank of Cleveland, Myrseth is at University of St Andrews, and Schoenle is at Brandeis University. Heimer can be contacted at: rawley.heimer@researchfed.org, Myrseth at kom@st-andrews.ac. uk and Schoenle at schoenle@brandeis.edu. The authors are grateful for the research assistance of Timothy Stehulak, David Love for generously providing us with his Matlab programs, and the assistance of Diane Mogren and Kathy Popovich for helping obtain the survey data. They thank Joseph Briggs, Stephen Cecchetti, Tony Cookson, Simon Gilchrist, Daniel Hamermesh, Zoran Ivkovich, Paula Lopes-Cocco, Alex Michaelides, Olivia S. Mitchell, John Mondragon, Stefan Nagel, Jim Poterba, Andrei Shleifer, Klaus Schmidt, David Skeie, and participants at Brandeis, Fed Cleveland, Colorado Boulder, Drexel, IIES, Sveriges Riksbank, Cesifo Area Conference in Behavioral Economics, Cleveland Fed Household Finance Conference, IDC-Herzliya 13th Annual Conference in Financial Economics, London Business School European Winter Finance Conference, NBER Summer Institute, Netspar International Pension Conference, the Northern Finance Association, the Quadrant Asset Management Conference, and the Society for Economic Dynamics Annual Meeting for helpful comments and suggestions. The views in this article do not necessarily reflect those of the Federal Reserve Bank of Cleveland or the Board of Governors. Individuals hold distorted views of low-probability events and, for most of one’s life, few events are less likely to occur than one’s death. Yet, visions of our own mortality can have important economic consequences. For example, sharks are responsible for an average of just one U.S. death per year (cows kill around 20 people on average), but according to a headline in the August 29, 2015 edition of the L.A. Times, “La Jolla beach closed after shark sighting. ” And during Super Bowl 47, Prudential Financial Inc. aired a commercial in which 400 individuals were asked to indicate the age of the oldest person they know. The results indicated an average close to 100years-old, prompting viewers to believe we are living longer and potential customers to contact Prudential today. These examples illustrate how salient risk factors influence economic decision-making via our beliefs. Motivated by recent efforts to use survey elicited beliefs to understand discrepancies between classical economic models and real outcomes,1 we measure subjective mortality beliefs and consider their effect on inter-temporal household decision-making and life-cycle implications. We find that these elicited beliefs bring us closer to jointly understanding why some young people undersave towards retirement (Skinner (2007)) and retirees do not fully draw down their assets (Poterba et al. (2011)). Our reason for studying this mechanism is that subjective mortality beliefs have direct bearing on what is among the equations most studied by the discipline: the intertemporal trade-off between consumption today and the discounted present value of future consumption streams, V ∗ t (·) = max Ct {u(Ct)+β st+1Et[V ∗ t+1(·)]}. The discount factor (β ) and the utility function’s curvature (ρ) have been studied countless times. However, despite no indication that subjective mortality beliefs (st+1) are any less meaningful, they 1These efforts have been applied to the recent housing boom (Soo (2015); Bricker et al. (2015)), historical asset prices (Greenwood and Shleifer (2014)), consumption choices Christelis et al. (2015), or the difficulty implementing monetary policy (Coibion et al. (2015)).