YOLO: Mortality Beliefs and Household Finance Puzzles

Heimer, Rawley Z.; Myrseth, Kristian Ove R.; Schoenle, Raphael S.

doi:10.1111/jofi.12828

Journal of Finance 74 (6): 2957–2996

YOLO: Mortality Beliefs and Household Finance Puzzles

Rawley Z. Heimer, Kristian Ove R. Myrseth, and Raphael S. Schoenle

Dimensional Fund Advisors Distinguished Paper Award. TIAA Paul A. Samuelson Award Finalist.

Abstract. We study the effect of subjective mortality beliefs on life-cycle behavior. With new survey evidence, we document that survival is underestimated by the young and overestimated by the old. We calibrate a canonical life-cycle model to elicited beliefs. Relative to calibrations using actuarial probabilities, the young under-save by 26%, and retirees draw down their assets 27% slower, while the model’s fit to consumption data improves by 88%. Cross-sectional regressions support the model’s predictions: distorted mortality beliefs correlate with savings behavior while controlling for risk preferences, cognitive, and socioeconomic factors. Overweighting the likelihood of rare events contributes to mortality belief distortions.

Keywords: subjective mortality beliefs, life expectancy, life-cycle model, retirement saving, undersaving, asset decumulation, probability weighting, survey evidence.

In brief

People’s beliefs about how long they will live are systematically off, and this helps explain why the young save too little and retirees spend down their savings too slowly.

New survey evidence shows that young people underestimate their chances of survival while older people overestimate theirs. Feeding these beliefs into a standard life-cycle model, the young under-save by 26% and retirees draw down assets 27% more slowly than they would using actuarial survival odds, and the model’s fit to real consumption data improves by 88%. The distortions are linked to overweighting the likelihood of rare events.

**Table 1.** Study at a glance
Panel A. Design
Question	How do people’s beliefs about their own survival affect saving and spending over the life cycle?
Data	New survey evidence on subjective survival beliefs
Method	A canonical life-cycle model calibrated to elicited beliefs versus actuarial probabilities; cross-sectional regressions
Panel B. Reported effects of using elicited beliefs
Saving by the young		26% lower
Asset drawdown by retirees		27% slower
Model fit to consumption data		88% better

Summarized from the paper. See the paper for exact estimates and specifications.

Read and cite

Heimer, Rawley Z., Kristian Ove R. Myrseth, and Raphael S. Schoenle. 2019. “YOLO: Mortality Beliefs and Household Finance Puzzles.” Journal of Finance 74 (6): 2957–2996. https://doi.org/10.1111/jofi.12828.

@article{heimer2019yolo,
  author  = {Heimer, Rawley Z. and Myrseth, Kristian Ove R. and Schoenle, Raphael S.},
  title   = {{YOLO}: Mortality Beliefs and Household Finance Puzzles},
  journal = {Journal of Finance},
  volume  = {74},
  number  = {6},
  pages   = {2957--2996},
  year    = {2019},
  doi     = {10.1111/jofi.12828},
  url     = {https://onlinelibrary.wiley.com/doi/full/10.1111/jofi.12828}
}

Topics: Saving, retirement, and inheritance; Behavioral finance and beliefs
Related papers: Shale Shocked: Cash Windfalls and Household Debt Repayment; Personal Wealth, Self-Employment, and Business Ownership; Subjective Beliefs, Saving, and Spending for Retirement; Five Facts about Bequest Motives

In brief

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