Inheritance is an important motive for saving
‘How individuals react when their life expectancy is suddenly reduced can give us insight into how we make financial choices,' says Jens Sørlie Kværner, who recently defended his doctoral thesis at NHH.
Whether a change in life expectancy affects saving and risk-taking largely depends on family structure and households’ total balance.
Altruistically motivated saving
Jens S Kværner’s study focuses on what economists call the bequest motive – altruistically motivated saving driven by a desire to leave financial resources to others.
‘The empirical data I have analysed show that we do not just save in order to ensure that we can have stable consumption throughout our lives, but that we to a large extent save in order to pass on financial assets to a surviving spouse and the next generation.
'The thesis documents what financial transactions people have actually made. The results could potentially have normative implications and provide financial advisers with a better basis for giving advice to people in very difficult life situations,' Kværner believes.
Reduced life expectancy
Both common sense and basic economic theory tell us that life expectancy has a lot to say for financial choices. Empirically, it has been very difficult, however, to identify and quantify exactly how life expectancy – and especially the interaction between life expectancy and family structure – affects financial choices.
Kværner’s doctoral thesis has now given us new insight into this question. He uses Norwegian cancer diagnoses in combination with Norwegian register data to gain insight into how we make financial decisions.
‘From an economic perspective, a cancer diagnosis differs from many other diagnoses because, in addition to the burden of the disease itself, it affects life expectancy.’
A good or poor prognosis
In the first article, he investigates how the family situation affects savings decisions among people who have received cancer diagnoses with different probabilities of survival.
The data material contains information about type of cancer, the stage of the disease and the five-year survival probability.
One key result from the study is that family structure – whether you live with a spouse or live alone and whether you have children – has a big influence on different financial decisions following a cancer diagnosis. For instance, people who are married or cohabitants increase or maintain their wealth unchanged, irrespective of the probability of survival.
‘Single people with children reduce their wealth, although part of the reduction in wealth can be explained by inheritance.’
Kværner points out that this indicates that the bequest motive is very strong in households comprising spouses/cohabitants and children. A change in life expectancy has little effect on how they save.
Kværner believes that it might be relevant to link the findings from the study to the consequences of various tax policy measures. How large the possible incentive effects of inheritance tax are will naturally be a function of how strongly people emphasise passing on their wealth to their own children.
In the second article, Kværner shows that life expectancy and family factors also influence our risk taking in the stock market.
This article was written together with Associate Professor Trond E Døskeland of the Department of Finance and Management Science at NHH. In addition, Associate Professor Espen Henriksen of the Department of Finance at BI Norwegian Business School has been Kværner’s supervisor.
The sample in the study had money invested in shares or unit trusts before they were diagnosed. The study is contingent on this population.
Reduce their exposure
‘Among other things, the study shows that single pensioners who are suddenly told that their life expectancy is reduced tend to reduce their exposure to stocks and shares.’
These results are in line with the findings from the study on the bequest motive, which showed that single people who are suddenly told of a reduction in life expectancy reduce their wealth. They do not have the same family bequest motive.
‘Our analyses indicate that those of us who are in a family situation do not change the composition of our portfolio to any great extent when our life expectancy changes. This is a choice that is line with basic portfolio theory. On that basis, we can assume that this is a choice that is probably in people’s interests in the long term,’ Kværner says.