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Federal Reserve Bank of Cleveland
Working Paper
YOLO: Mortality Beliefs and Household Finance Puzzles
Rawley Heimer
Ove R. Myrseth
Raphael Schoenle
Abstract

Subjective mortality beliefs affect pre- and post-retirement consumption and savings decisions, as well as portfolio allocation. New survey evidence shows that individuals overestimate their mortality at short horizons and survival rate at long horizons. For example, a 28-year-old male with a 99.4% chance of surviving beyond 5 years believes he will do so with 92.8% probability. A 68 year old with a 71.4% probability of living to 78 believes he has an 82.4% chance of living that long. The formation of these beliefs across age cohorts can be attributed to overweighting salient causes-of-death. This bias matters empirically: Survival expectations correlate with heterogeneity in financial education and investment behavior. Embedded in a run-of-the-mill life-cycle model, these beliefs cause the young to under-save and retirees to not fully draw down their assets. In addition, for reasonable levels of risk-tolerance, the required excess rate of return on equity is in line with historical averages once subjective beliefs are accounted for.


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Rawley Heimer & Ove R. Myrseth & Raphael Schoenle, YOLO: Mortality Beliefs and Household Finance Puzzles, Working Paper 1521, Federal Reserve Bank of Cleveland, 21 Oct 2015.
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