In reaction to this counterintuitive idea, Thaler and his colleague Hersh Sheffrin proposed the "behavioral life-cycle hypothesis
," in which consumption depends both on one's mental accounts and on one's lifetime wealth.
Their results provide mixed support for the life-cycle hypothesis
and the permanent income hypothesis, and are consistent with the existence of inertia or persistence in household saving behavior.
Second, according to Albert Ando and Franco Modigliani's life-cycle hypothesis
, individuals spread their lifetime consumption over the span of their lives by accumulating savings during earning years and maintaining consumption levels during retirement.
Given the life-cycle hypothesis
, this type of intergenerational risk sharing reinforces the preference of younger people to invest in equity (Heeringa, 2008).
The objective of this paper is to provide a sound theoretical framework for the empirical analysis of consumer indebtedness, by integrating Portfolio theory with the Life-Cycle hypothesis
(LCH) model of consumption.
After describing the economic legacy of Ando, contributors offer their research on the age-saving profile and the life-cycle hypothesis
, estimates of wealth effects of capital gains on Italian households, demographic and economic changes at the personal level in Italy, the question of whether the elderly save inappropriately in Japan, robust monetary policy, the euro and the transmission of monetary policy, monetary and fiscal policy in a liquidity trap, non-affine structure and systematic risk sources in generalized duration, the over-investment hypothesis, designing indexed units of account, land prices and business fixed investments in Japan, and, in closing, rationality, behavior and switching idiosyncrasies in the euro-dollar exchange rate.
Another area of Modigliani's fundamental contribution to economics is his life-cycle hypothesis
of the consumption function.
The results support the life-cycle hypothesis
The primary behavioral theory is the behavioral life-cycle hypothesis
(Shefrin and Thaler, 1988) that is grounded in an "economic theory of self-control" (Thaler and Shefrin, 1981).
Modigliani, "The Life-Cycle Hypothesis
of Saving: Aggregate Implications and Tests," American Economic Review, vol.
One possible explanation may be life-cycle hypothesis
The life-cycle hypothesis
postulates that individuals spread their consumption evenly over their life spans by saving during the earning span and dissaving during retirement (Ando and Modigliani, 1963).