A life-cycle consumption model with ambiguous survival beliefs

On average, “young” people underestimate whereas “old” peopleoverestimate their chances to survive into the future. We adopt aBayesian learning model of ambiguous survival beliefs which repli-cates these patterns. The model is embedded within a non-expectedutility model of life-cycle consumption and saving. Our analysisshows that agents with ambiguous survival beliefs (i) save less thanoriginally planned, (ii) exhibit undersaving at younger ages, and (iii)hold longer on to their assets than their rational expectations counterparts who correctly assess survival probabilities. Our ambiguity-driven model therefore simultaneously accounts for three important empirical findings on household saving behavior.

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