Subjective survival beliefs and social networks
By Seung Jeonga, Iqbal Owadallya, Steven Habermana & Douglas Wright
People’s perceptions about their chances of survival are known to deviate from the objective survival probabilites derived statistically from mortality data. This is crucial because it may explain why people save too little, why their retirement plans are inadequate, and why they do not buy financial security products such as life insurance and annuities which could protect them and their family in the event of early death or in old age. We build an agent-based model where agents form their subjective survival beliefs by observing the deaths of others in their social network. The model is calibrated and validated on data from the Survey of Consumer Finance. Even though agents use a simple behavioural rule for updating their survival expectations, learning from and interacting stochastically with other heterogeneous agents across their network generates survival beliefs that replicate patterns in the survey data. The size of the immediate network where individuals observe deaths appears to be a critical influence on their subjective beliefs. This may help to design policies that drive individuals to save and invest more and to protect themselves financially using insurance.
Source SSRN
