Robust consumption for individuals with pessimistic survival beliefs

Xuejiao Chen, Peng Li, Ming Zhou and Bing Liu

Communications in Statistics - Theory and Methods, 2024, vol. 53, issue 14, 4991-5002

Abstract: As some literature reveal, young people generally keeps pessimistic survival beliefs, and individuals usually make decisions based on their expectations instead of the experience data. Motivated by this idea, we study the optimal consumption problem for individuals with ambiguity aversion about their mortality. Closed-form robust consumption policy before retirement is obtained by solving the HJB equation by employing the dynamic programming principle. The result tells us that pessimistic survival beliefs, together with interest rate, risk attitude, and expectations for the retirement, play an important role on the consumption and saving decision-making. Reducing interest rates can promote consumption, but the impact is not significant. Both mortality and risk aversion level have significant impacts on the consumption. Too much pessimistic survival beliefs or too much low risk aversion level would lead to overconsumption.

Date: 2024
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DOI: 10.1080/03610926.2023.2198659

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