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MENTAL MODEL · M5805

Life-cycle Hypothesis

Life-cycle Hypothesis
BusinessHigh supportMacroeconomics
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Updated 2026-08-05

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INTRODUCTION

English translation pending.

CORE DEFINITION

Developed by Franco Modigliani and Richard Brumberg, the hypothesis states that individuals plan consumption over their entire lifetime rather than matching spending to current income, so they borrow early, save during peak earning years, and dissave in retirement. The core claim is that saving behavior reflects lifetime income expectations rather than current income alone. The qualification is that the model assumes foresight and access to credit, and it weakens under liquidity constraints and short-sightedness.

SCAFFOLDING EFFECT

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- Use Lifetime Framing: Plan saving and spending against total expected lifetime resources rather than this year's income. - Use Permanent Versus Temporary: Separate durable income changes from one-off windfalls when deciding how much to spend. - Use Smoothing Rule: Keep consumption steady instead of letting it track every fluctuation in income.

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If people can borrow and save freely, the marginal value of consumption is equalized across periods, so a temporary income change produces little change in spending while a permanent change produces a large one. Aggregate saving therefore depends on the age structure of the population, since the number of people in their high-saving years determines how much is set aside for retirement. This is why demographics shift national saving rates over long horizons.

MINIMUM ACTION

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Source support: Explicit

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    en.wikipedia.orghttps://en.wikipedia.org/wiki/Life-cycle_hypothesisZH · Explicit
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