Time-inconsistent preferences, consumption, investment and life insurance decisions

ABSTRACT

In this paper, we study a consumption, investment and life insurance strategy model in which agent has time-inconsistent preferences. We numerically find that time-inconsistent preferences lead agent to more consumption–wealth ratio and less insurance–wealth ratio, and that time-inconsistent agent purchases life insurance in advance. Moreover, both the consumption–wealth ratio and amount of life insurance purchased for naive agent are less than for sophisticated one, while total available wealth for naive agent is more than for sophisticated one. In particular, total amount of life insurance purchased increases when agent is young, but the situation reverses when she is older.

KEYWORDS:

• Time-inconsistent preferences
• consumption
• portfolio rules
• life insurance purchased

JEL CLASSIFICATION:

• C61
• G11
• D91

Acknowledgments

We thank David Peel and two anonymous referees of this journal for suggestions that have decisively shaped this version.

Disclosure statement

No potential conflict of interest was reported by the authors.

Additional information

Funding

This work was supported by the National Natural Science Foundation of China [71521061, 71790593] and Hunan Provincial Graduate Innovation Fund of China [CX2016B076].