Mortality Beliefs and Saving Decisions: The Role of Personal Experiences

Abstract

This paper is the first to establish a causal relationship between households’ mortality beliefs and subsequent saving and consumption decisions. Motivated by prior literature on the effect of personal experiences on individuals’ expectation formation, I exploit the death of a close friend as an exogenous shock to the salience of mortality of a household. Using data from a large household panel, I find that the death of a close friend induces a significant reduction in saving rate of 1.1 percentage points that grows to 1.7 percentage points over the following 6 years. I show that the incorporation of personal experiences in mortality beliefs can be explained by the canonical consumption life-cycle model augmented by the experience-based learning model. The saving response to the shock strongly depends on households’ age, emotional involvement, risk aversion, and decays over time. Overall, this paper provides novel insights into whether and how mortality beliefs are incorporated into households’ financial planning.