Modeling of biological and subjective age with economic applications

The distinction among chronological, biological, and subjective age is not only well established in biomedical and psychosocial research on human longevity and healthspan, but is also increasingly relevant in economics due to its superior predictive power for mortality and individual decision-making. In this paper, we propose a realistic yet parsimonious model of an individual's biological and subjective age. Moreover, our model explicitly incorporates the interaction between biological and subjective age, as documented in empirical studies (e.g., Stephan et al., 2015). It replicates key findings from the literature, such as the observation that biological age can differ up to 20 years from the chronological age (Bortz et al., 2023), or that people older than 40 believe to be 20% younger (Rubin and Berntsen, 2006). To facilitate economic applications, we develop a three-state lifecycle model in which transition probabilities are determined by biological and subjective age, respectively. As an illustration, we apply the framework to a consumption and portfolio choice problem, where health-dependent utility functions are applied.