 Optimal investor life cycle decisions with time-inconsistent preferencesShumin Chen, Dan Luo and Haixiang Yao Journal of Banking & Finance, 2024, vol. 161, issue C Abstract: We examine the lifetime decisions of an investor with time-inconsistent preferences, obtaining optimal time-consistent strategies for investment, consumption, and life insurance premiums explicitly under a stationary Markov perfect equilibrium framework. We find that the investor increases consumption to seek immediate gratification, and simultaneously increases life insurance purchasing to fulfill a legacy need. However, at a later stage in the life cycle, the investor confronts slower wealth accumulation and reduces consumption and life insurance purchasing accordingly. We also investigate the effects of naivete, degree of time inconsistency, risk preferences, legacy weight, insurance cost, death duty, and labor income on the investor's decision making. Our study reveals the balance of consumption, bequest, and terminal wealth motives in life cycle decisions featuring microfounded bequest utility and stochastic labor income. Keywords: Time-inconsistent preferences; Life cycle decisions; Dynamic programming; Markov perfect equilibrium; Life insurance (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:161:y:2024:i:c:s0378426624000359 DOI: 10.1016/j.jbankfin.2024.107115 Access Statistics for this article Journal of Banking & Finance is currently edited by Ike Mathur More articles in Journal of Banking & Finance from Elsevier |
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