What is the 'Life-Cycle Hypothesis (LCH)'

The life-cycle hypothesis (LCH) is theis 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).

BREAKING DOWN '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. Hypothesis Testing

    A process by which an analyst tests a statistical hypothesis. ...
  2. Average Propensity To Save

    The average propensity to save (APS) is an economic term that ...
  3. Null Hypothesis

    A type of hypothesis used in statistics that proposes that no ...
  4. Average Propensity To Consume

    The average propensity to consume (APC) refers to the percentage ...
  5. Franco Modigliani

    An Italian-American Keynesian economist. Modigliani was born ...
  6. Marginal Propensity To Consume ...

    A component of Keynesian theory, MPC represents the proportion ...
Related Articles
  1. Investing

    Hypothesis Testing in Finance: Concept & Examples

    When you're indecisive about an investment, the best way to keep a cool head might be test various hypotheses using the most relevant statistics.
  2. Investing

    What is a Null Hypothesis?

    In statistics, a null hypothesis is assumed true until proven otherwise.
  3. Retirement

    Target Your Retirement With Life-Cycle ETFs

    These target-date funds provide asset allocation and rebalancing at a low cost.
  4. Insights

    Explaining Marginal Propensity to Consume

    The marginal propensity to consume is a measure of how much consumption changes when income changes.
  5. Investing

    How Statistical Significance is Determined

    If something is statistically significant, it’s unlikely that it happened by chance.
  6. Investing

    Efficient Market Hypothesis

    An investment theory that states it is impossible to "beat the market".
  7. Insights

    Calculating the Consumption Function

    The consumption function shows the level of consumer spending as it relates to disposable income.
  8. Investing

    2015's Top Hedgie: Dalio is King; Ackman Humbled

    Bill Ackman is out and Ray Dalio is in.
  9. Investing

    Life-Cycle Funds: Can It Get Any Simpler?

    Discover a security that offers a way for you to put your retirement portfolio on autopilot.
RELATED FAQS
  1. How is marginal propensity to save calculated?

    Find out about marginal propensity to save, what the it indicates about a household and how to calculate a household's marginal ... Read Answer >>
  2. How does the income of a person influence their marginal propensity to save?

    Discover how an individual's income can generally influence his marginal propensity to save and his marginal propensity to ... Read Answer >>
  3. How does pork barrel spending hurt the economy?

    Learn what factors affect the marginal propensity to consume, how the MPC can be negative and why it plays a key role in ... Read Answer >>
  4. How does the marginal propensity to consume in the United States compare to other ...

    Learn how the marginal propensity to consume in the United States compares to that of other countries and why the United ... Read Answer >>
  5. Marginal propensity to Consume (MPC) Vs. Save (MPS)

    Learn the significant roles that the marginal propensity to consume and the marginal propensity to save play in Keynesian ... Read Answer >>
  6. Has the Efficient Market Hypothesis been proven correct or incorrect?

    Explore the efficient market hypothesis and understand the extent to which this theory and its conclusions are correct or ... Read Answer >>
Hot Definitions
  1. Mobile Wallet

    Mobile wallet is a virtual wallet that stores payment card information on a mobile device.
  2. Leverage

    1. The use of various financial instruments or borrowed capital, such as margin, to increase the potential return of an investment. ...
  3. Trumponomics

    Trumponomics is a term for the economic policies of President Donald Trump.
  4. Universal Health Care Coverage

    An organized healthcare system that provides healthcare benefits to all persons in a specified region. Many countries, such ...
  5. Davos World Economic Forum

    The annual meeting of the World Economic Forum hosted at Davos—a small ski town in Switzerland—in January each year is among ...
  6. Smart Home

    A convenient home setup where appliances and devices can be automatically controlled remotely from anywhere in the world ...
Trading Center