Overconfidence and Consumption over the Life Cycle

Frank Caliendo and Kevin Huang ()

No 712, Vanderbilt University Department of Economics Working Papers from Vanderbilt University Department of Economics

Abstract: Overconfidence is a widely documented phenomenon. In this paper, we study the implications of consumer overconfidence in a life-cycle consumption/saving model. Our main analytical result is a necessary and sufficient condition under which any degree of overconfidence concerning the mean return on savings can produce a hump in the work-life consumption profile. This condition is almost always met in the data. We show by simulations that overconfidence concerning the variance of the return can have little effect on the long-run average behavior of consumption over the life cycle, and that our basic conclusion is fairly robust with various realistic modifications to the baseline model. We interpret the general applicability of our analytical framework and discuss our numerical results in the light of aggregate consumption data.

Keywords: Overconfidence; consumption; life cycle; time inconsistency; hump shape; elasticity of intertemporal substitution (search for similar items in EconPapers)
JEL-codes: D91 E21 (search for similar items in EconPapers)
Date: 2007-08
New Economics Papers: this item is included in nep-bec, nep-cbe, nep-dge and nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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http://www.accessecon.com/pubs/VUECON/vu07-w12.pdf First version, 2007 (application/pdf)

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Journal Article: Overconfidence and consumption over the life cycle (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:van:wpaper:0712

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