Rationality of longevity expectations: Evidence from the Korean Longitudinal Study of Aging

This study utilizes data from the Korean Longitudinal Study of Aging to test the rational expectations hypothesis regarding longevity expectations. The rationality of longevity expectations is tested on two grounds: belief formation and its association with consumption and savings outcomes. Although individuals seem to have little knowledge of lifespan, they revise their survival forecast rationally and systematically in response to new information. The updating process follows a random walk as predicted by a Bayesian learning model. We also show that consumption and savings behaviors vary with this rationally formed expectations as if individuals make deliberate long-range plans. Overall, these findings lend further support to the rational expectations hypothesis and individuals as forward-looking decision makers.