Course Overview

  • What is your sustainable standard of living?
  • How much of your income do you need to save each year to smooth out of your standard of living over time?
  • How can you maximize your standard of living?
  • What do you need to do to protect your standard of living?

Every financial, human capital, and demographic choice entails benefits and costs, and your decisions will affect your lifetime standard of living. The life-cycle model provides a framework for making financial decisions along one's life path, and recognizing and valuing the financial aspects of seemingly non-financial decisions. The framework is standard microeconomic theory of household behavior, extended to deal with decision making that occurs over time as well as across times -- good times and bad times.

EC171 is an introduction to applied economics, which applies the life cycle model to personal economic decisions including: spending, saving, borrowing, insuring; matriculation; choosing careers, jobs, and locations; marrying, having children, divorcing; retiring, retirement accounts, taking Social Security; buying insurance; and investing in stocks and bonds.


  • What is your human capital worth? How can you maximize and protect your human capital investment?
  • How much of your income should you consume versus save?
  • Smoothing your living standard through time and across good times and bad.
  • The time value of money and the effects of inflation.
  • Taxes and the impact of taxes on consumption decisions.
  • Should you go to college? What should you study? How to pay for college?
  • Which job to take? Is grad school worth it?
  • Where should you live? Should you buy or rent your housing?
  • Should you get married? have kids? get divorced?
  • Why buy insurance, and how much do you need?
  • How much should you save for retirement? How should that money be invested?
  • What are risk-free and risky investments? Which should you choose?
  • When should you start taking social security?
  • How to draw down your assets in retirement.

Economic Background

Starting with the path-breaking work of Yale's Irving Fisher, economists, including six Nobel Laureates, have spent close to a century developing the life-cycle model. This model covers the gamut of personal economic decisions, including spending, saving, borrowing, insuring, matriculating, choosing careers, choosing jobs, choosing locations, marrying, having children, divorcing, retiring, contributing to retirement accounts, taking Social Security, making gifts and bequests, buying insurance, and making investment decisions about how much of your savings to invest in safe assets and how much to invest in risky assets.

The short-hand for this framework is life-cycle consumption smoothing, where "smoothing" references the need to spread your economic resources over your lifetime, taking into account that your future is highly uncertain. The presentation and intuitive application of consumption smoothing will be central to this course.

The life-cycle model's focus is highly practical, but discerning its recommendations can be complex, particularly when there are limits on borrowing and when one faces multiple, interconnected uncertainties, including uncertain future labor earnings, healthcare expenditures, rates of return, inflation rates, and government policies.

Traditional life-cycle economics assumes that households are consistent and rational in making life-path choices. But a new school of thought, known as behavioral finance, which is deeply influenced by the fields of psychology and neurology, has questioned that assumption. This course will survey behavioral finance and its findings as they pertain to life-cycle decision making, but do so after first spelling out the traditional approach.

Want more information?

Contact the instructor, Aaron Stevens [].
Updated 3/28/2011