A Behavioural Gap in Survival Beliefs

Abstract

Life span uncertainty (longevity risk) impacts several economic decisions. Individuals can form and revise their survival beliefs making use of behavioural heuristics. We propose a model of sentiment, in which individuals are assumed to switch between optimistic and pessimistic expectations on their health. When optimism is persistent in the face of health shocks, or when individuals are more likely to change their sentiment from pessimistic to optimistic than otherwise, our model predicts survival under-estimation at young ages and over-estimation at old ages. An empirical analysis based on the longitudinal data from the Health and Retirement Study (HRS) validates our model.