Aging & Social Change: Ninth Interdisciplinary Conference

Abstract

According to the life-cycle hypothesis (LCH), whereby elderly people draw on the assets which they accumulated during their working lives, aging society is likely to reduce the savings rate of the country as a whole. However, when looking at the household savings rate in terms of age brackets, employed elderly people have higher savings rates than the younger ones and retired ones also have strong wariness when it comes to spending money. Lots of empirical studies have concluded that LCH is not convincing. Therefore, they attempt to explain by employing the following two hypotheses: 1)“precautionary motive” which refers to the unexpected health problems, 2) “bequest motive” which refers to the desire to leave things to their offspring. In spite of the accumulation of economic studies, there have not been sufficient responses to these two motives. Japanese elderly people do not have these two motives, since the medical insurance/long-term care insurance system has already been enhanced, and the number of single households and unmarried people among the elderly people has dramatically increased. Prospect theory combines important ideas from psychology and economics into an eclectic model of decision-making. This theory exists in the context of both risk and uncertainty and it has been applied to individual decision making in various kind of situations. Based on prospect theory, this study demonstrates the impact of elderly people’s risk aversion towards consumption/saving behavior, shedding light on psychological factors such as social isolation due to longevity using Japanese data.