Subjective Survival Curves and Life Cycle Behavior
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Many economic models are based on forward-looking behavior on the part of economic agents. Although it is often said that expectations about future events are important in these models, more precisely it is the probability distributions of future events that enter the models. For example, consumption and savings decisions of an individual are thought to depend on what he or she thinks about future interest rates, the likelihood of dying, and the risk of substantial future medical expenditures. According to our theories, decision makers have probability distributions about these and other events, and they use them to make decisions about saving. This implies that data on these distributions should be used in estimation.
