Subjective Beliefs, Saving, and Spending for Retirement

Abstract Beliefs about future events are crucial to the decisions that people make when developing financial plans over the life cycle. Yet peoples’ subjective beliefs can often differ from the objective probabilities that economists and financial planners use in their models. This chapter discusses findings on subjective beliefs, how people might form their beliefs, and how these beliefs affect conclusions drawn from a classical economic life-cycle model. The author highlights a specific divergence between subjective beliefs and objective probabilities: subjective beliefs about peoples’ mortality. Incorporating these subjective mortality beliefs into standard models helps explain observed financial behaviors, including under-saving for retirement and increased risk taking, that are difficult to reconcile using actuarial probabilities alone.