The Behavioral Life-Cycle Hypothesis (LH)

The Life-Cycle Hypothesis (LCH) posits that as households transition through different financial stages over the life cycle, consumption and wealth accumulation will vary as individuals attempt to hold their marginal utility of consumption constant. The Behavioral Life-Cycle Hypothesis (BLC) posits that the marginal propensity to consume is based on a consumer’s financial wealth, which is determined by the components of the consumer’s lifetime financial resources. The key assumption of the BLC is that the lifetime financial resources of a household consist of non-fungible wealth divided up as current income, current wealth, and future income. The BLC modifies the traditional life cycle model by incorporating the behavioral constructs of self-control, …show more content…
families conducted by the National Opinion Research Center at the University of Chicago. The SCF is sponsored by the Federal Reserve Board in cooperation with the Department of the Treasury’s Statistics of Income Division. The SCF collects data regarding U.S. household financial characteristics and behavioral characteristics. As noted in the 2013 SCF codebook, the data in the survey are intended to represent the characteristics of a subset of the household unit referred to as the primary economic unit (PEU). The PEU consists of an economically dominant single individual or couple in a household. Employment, pension, and demographic characteristics are collected separately for the respondent and the spouse / partner of the respondent. The majority of the time, the PEU and the household are identical. The use of the term, head of household, is euphemistic and reflects the systematic way in which the data has been organized. A single individual is considered to be the PEU in a household without a core couple, the male is considered to be the head in a mixed-sex couple, and the older individual is considered the head in a same-sex household. When the original respondent was someone other than the person determined to be the head of the household, the data for the couple were systematically …show more content…
In the first model of this study, the value of financial assets is the dependent variable utilized to represent the financial wealth of consumers. Financial assets are a comprehensive measure that includes liquid assets, certificates of deposit, directly held pooled investment funds, stocks, bonds, quasi-liquid assets, savings bonds, whole life insurance, and other managed assets. The value of loans for goods and services is utilized as the dependent variable in the second model. Loans for goods and services represent the excess consumption spending on nondurable goods and services. Consumption smoothing in this form may lead to the accumulation of debt for