Abstract
AbstractThis article investigates the roles of psychological biases for deviations between subjective survival beliefs (SSBs) and objective survival probabilities. We model these deviations through age‐dependent inverse S‐shaped probability weighting functions. Our estimates suggest that implied measures for cognitive weakness increase and relative optimism decrease with age. Direct measures of cognitive weakness and optimism share these trends. Our regression analyses confirm that these factors play strong quantitative roles in the formation of SSBs. Our main finding is that cognitive weakness instead of optimism becomes with age an increasingly important contributor to the well‐documented overestimation of survival chances in old age.
Highlights
Important economic problems, such as the decision about when to retire, how much to save for retirement and whether to purchase life-insurance, depend on the formation of survival beliefs over an individual’s life-cycle
Our main finding suggests that the age patterns of biases in survival beliefs documented in many studies are driven by increasing cognitive weakness inducing a monotonically increasing bias in survival misconception from an underestimation of survival beliefs by -5%p at age 65-69 to an overestimation by 5%p at age 85-89
What are the economic implications of our findings? If we were to use our parameter estimates in a life-cycle model of consumption and savings in order to calibrate subjective survival beliefs we would conclude with similar findings as in Groneck et al (2016) and report that life-cycle models with biased survival beliefs substantially improve the model fit to data on life-cycle asset holdings, relative to a rational expectations benchmark
Summary
Important economic problems, such as the decision about when to retire, how much to save for retirement and whether to purchase life-insurance, depend on the formation of survival beliefs over an individual’s life-cycle. For our structural interpretation of these biases we model SSBs as age-dependent inverse S-shaped Prelec (1998) probability weighting functions (PWFs). Cognitive weakness leads to a further age-increasing flatness of the probability weighting function, which induces an additional underestimation of subjective survival beliefs at age 65 by about -5%p, and to an additional overestimation at age 85 by 5%p. In contrast to these dynamic e↵ects of cognition, the impact of the motivational factor relative optimism is constant in age leading to an upward bias by about 10%p. Separate appendices contain further information on the data and additional results
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