Faculty of Economics and Business Administration Publications Database

A life-cycle model with ambiguous survival beliefs

Selected
Authors:
Groneck, Max
Zimper, Alexander
Source:
Volume: 162
Pages: 137 - 180
Month: March
ISSN-Print: 0022-0531
Link External Source: Online Version
Year: 2016
Keywords: Bayesian learning; Likelihood insensitivity; Ambiguity; Dynamic inconsistency; Subjective survival beliefs; Saving puzzles
Abstract:

Based on a cognitive notion of neo-additive capacities reflecting likelihood insensitivity with respect to survival chances, we construct a Choquet Bayesian learning model over the life-cycle that generates a motivational notion of neo-additive survival beliefs expressing ambiguity attitudes. We embed these neo-additive survival beliefs as decision weights in a Choquet expected utility life-cycle consumption model and calibrate it with data on subjective survival beliefs from the Health and Retirement Study. Our quantitative analysis shows that agents with calibrated neo-additive survival beliefs (i) save less than originally planned, (ii) exhibit undersaving at younger ages, and (iii) hold larger amounts of assets in old age than their rational expectations counterparts who correctly assess their survival chances. Our neo-additive life-cycle model can therefore simultaneously accommodate three important empirical findings on household saving behavior.

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