Ambiguity Aversion, Portfolio Choice, and Life Expectancy

Alistair Macaulay and Chenchuan Shi
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Alistair Macaulay: University of Surrey
Chenchuan Shi: University of Oxford

No 425, School of Economics Discussion Papers from School of Economics, University of Surrey

Abstract: This paper studies how wealth and aging affect portfolio choices in a life-cycle model with ambiguity aversion. Ambiguity aversion implies that wealthier and older agents are endogenously more optimistic about risky asset returns, relative to poorer younger agents. As life expectancy grows, old agents become even more optimistic, while young agents become more pessimistic, amplifying the age gaps in portfolio composition, and implying further increases in intergenerational inequality. We find evidence for the mechanism in survey data on portfolios and subjective life expectancy. In a quantitative extension of the model, plausible life expectancy projections imply a 26% increase in the age-gradient of conditional risky asset shares between 2019 and 2100.

JEL-codes: D84 E21 G11 J11 (search for similar items in EconPapers)
Pages: 74 pages
Date: 2025-04
New Economics Papers: this item is included in nep-age, nep-dge and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:sur:surrec:0425

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