Life-Cycle Hypothesis (LCH)

AAA

DEFINITION of 'Life-Cycle Hypothesis (LCH)'

The Life-Cycle Hypothesis (LCH) is an economic theory that pertains to the spending and saving habits of people over the course of a lifetime. The concept was developed by Franco Modigliani and his student Richard Brumberg. LCH presumes that individuals base consumption on a constant percentage of their anticipated life income. An example supporting the hypothesis is that people save for retirement while they are earning a regular income (rather than spending it all when it is earned).

INVESTOPEDIA EXPLAINS 'Life-Cycle Hypothesis (LCH)'

The Life Cycle Hypothesis concludes that the average propensity to consume is greater in both young and aging individuals, since they are borrowing against future income (in the case of young individuals) or using savings (as with aging or retired individuals). Middle-aged people, on the other hand, have a greater propensity to save and a lower propensity to consume, enhanced by a typically higher income.

RELATED TERMS
  1. Marginal Propensity To Consume ...

    A component of Keynesian theory, MPC represents the proportion ...
  2. Average Propensity To Save

    The average propensity to save (APS) is an economic term that ...
  3. Average Propensity To Consume

    The average propensity to consume (APC) refers to the percentage ...
  4. Consumer Spending

    The amount of money spent by households in an economy. The spending ...
  5. Consumption Function

    The consumption function is a mathematical formula laid out by ...
  6. Endowment Effect

    The endowment effect describes a circumstance in which an individual ...
RELATED FAQS
  1. What's the difference between consumer confidence and consumer sentiment?

    There isn't a difference between consumer confidence and consumer sentiment. Both terms are used to refer to the degree of ...
Related Articles
  1. Retirement

    Consumer Confidence: A Killer Statistic

    The consumer confidence is key to any market economy, so investors need to learn the measures and how to analyze them.
  2. Markets

    Consumer Spending As A Market Indicator

    What people buy and where they shop can provide valuable information about the economy.
  3. Options & Futures

    50 Years Of Consumer Spending

    Financially, decade has it MUCH worse than our parents and grandparents did, right? You may be surprised.
  4. Retirement

    Are You Saving Too Much?

    "Spend now! Don't worry about retirement," say some experts. Could they possibly be right?
  5. Personal Finance

    What Drives Consumer Demand for Tesla?

    Tesla did not invent the electric vehicle market, but it has brought to it elements of luxury and elite status. But what really drives demand for Teslas?
  6. Economics

    How A Limited Government Affects A Country's Finances

    Countries with limited governments have fewer laws about what individuals and businesses can and can’t do. What's the net result?
  7. Investing Basics

    How Does Goodwill Affect Financial Statements?

    Goodwill is a bit of a paradox--intangible, yet it is recorded as an asset on the purchasing company's balance sheet.
  8. Investing Basics

    Using Normal Distribution Formula To Optimize Your Portfolio

    Normal or bell curve distribution can be used in portfolio theory to help portfolio managers maximize return and minimize risk.
  9. Investing Basics

    R-Squared

    Learn more about this statistical measurement used to represent movement between a security and its benchmark.
  10. Insurance

    The Government And Risk: A Love-Hate Relationship

    Though the U.S. government can help its citizens by subsidizing risky loans, the costs always come back to the taxpayers.

You May Also Like

Hot Definitions
  1. Sunk Cost

    A cost that has already been incurred and thus cannot be recovered. A sunk cost differs from other, future costs that a business ...
  2. Technical Skills

    1. The knowledge and abilities needed to accomplish mathematical, engineering, scientific or computer-related duties, as ...
  3. Prepaid Expense

    A type of asset that arises on a balance sheet as a result of business making payments for goods and services to be received ...
  4. Gordon Growth Model

    A model for determining the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate. ...
  5. Cost Accounting

    A type of accounting process that aims to capture a company's costs of production by assessing the input costs of each step ...
  6. Law Of Supply

    A microeconomic law stating that, all other factors being equal, as the price of a good or service increases, the quantity ...
Trading Center