A Life-Cycle Model with Ambiguous Survival Beliefs

Max Groneck and Alexander Ludwig

No 201465, Working Papers from University of Pretoria, 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 em- bedded 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)
Pages: 53 pages
Date: 2014-10
New Economics Papers: this item is included in nep-age, nep-dge, nep-mac and nep-upt
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Citations: View citations in EconPapers (1)

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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 (2013)
Working Paper: A Life-Cycle Model with Ambiguous Survival Beliefs (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:pre:wpaper:201465

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