A Life-Cycle Model with Ambiguous Survival Beliefs

Max Groneck, Alexander Ludwig and Alexander Zimper

No 63, Working Paper Series in Economics from University of Cologne, Department of Economics

Abstract: On average, "young" people underestimate whereas "old" people overestimate their chances to survive into the future. We adopt a Bayesian learning model of ambiguous survival beliefs which replicates these patterns. The model is embedded within a non-expected utility model of life-cycle consumption and saving. Our analysis shows that agents with ambiguous survival beliefs (i) save less than originally planned, (ii) exhibit undersaving at younger ages, and (iii) hold larger amounts of assets in old age than their rational expectations counterparts who correctly assess their survival probabilities. Our ambiguity-driven model therefore simultaneously accounts for three important empirical findings on household saving behavior.

Keywords: Cumulative prospect theory; Choquet expected utility; Dynamic inconsistency; Life-cycle hypothesis; Saving puzzles (search for similar items in EconPapers)
JEL-codes: D83 D91 E21 (search for similar items in EconPapers)
Date: 2013-05-15, Revised 2013-11-22
New Economics Papers: this item is included in nep-age, nep-dge, nep-hea and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Journal Article: A life-cycle model with ambiguous survival beliefs (2016)
Working Paper: A life-cycle model with ambiguous survival beliefs (2015)
Working Paper: A Life-Cycle Model with Ambiguous Survival Beliefs (2014)
Working Paper: A Life-Cycle Model with Ambiguous Survival Beliefs (2013)
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