Life cycle saving: Insights from the perspective of bounded rationality

This paper provides a new life cycle model that takes into account key elements of bounded rationality. The paper shows that the model can account for patterns in the data that are hard to explain by the standard life cycle model. Among other patterns, the model predicts that, typically, the young either hold no equity or their equity portfolio share is rather low and then increases over working life. The analytical solution of the model demonstrates its high degree of tractability.

► New life cycle model with key elements of bounded rationality. ► These elements are: Hierarchical choice; no anticipation of future actual choices. ► Model explains patterns in data that are not explained by the standard model. ► The new model is very tractable.