Overconfidence and consumption over the life cycle

Frank Caliendo and Kevin Huang ()

Journal of Macroeconomics, 2008, vol. 30, issue 4, 1347-1369

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)
Date: 2008
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0164-0704(07)00154-1
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Overconfidence and Consumption over the Life Cycle (2007)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:30:y:2008:i:4:p:1347-1369

Access Statistics for this article

Journal of Macroeconomics is currently edited by Douglas McMillin and Theodore Palivos

More articles in Journal of Macroeconomics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().