THE BEHAVIORAL LIFE‐CYCLE HYPOTHESIS

TLDR

The Behavioral Life‑Cycle hypothesis extends the life‑cycle theory by treating wealth components as non‑fungible mental accounts—current income, current assets, and future income—with spending temptation highest for current income. Empirical evidence from published econometric studies largely supports the BLC theory.

Abstract

Self‐control, mental accounting, and framing are incorporated in a behavioral enrichment of the life‐cycle theory of saving called the Behavioral Life‐Cycle (BLC) hypothesis. The key assumption of the BLC theory is that households treat components of their wealth as nonfungible, even in the absence of credit rationing. Specifically, wealth is assumed to be divided into three mental accounts: current income, current assets, and future income. The temptation to spend is assumed to be greatest for current income and least for future income. Considerable empirical support for the BLC theory is presented, primarily drawn from published econometric studies.