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. Permanent Income Hypothesis

    A theory of consumer spending which states that people will spend ...
  3. Average Propensity To Save

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

    A type of hypothesis used in statistics that proposes that no ...
  5. Marginal Propensity To Consume ...

    A component of Keynesian theory, MPC represents the proportion ...
  6. Marginal Propensity to Save

    The proportion of an aggregate raise in pay that a consumer spends ...
Related Articles
  1. Investing

    What is a Null Hypothesis?

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

    Target Your Retirement With Life-Cycle ETFs

    These target-date funds provide asset allocation and rebalancing at a low cost.
  3. Investing

    Efficient Market Hypothesis

    An investment theory that states it is impossible to "beat the market".
  4. Investing

    How Statistical Significance is Determined

    If something is statistically significant, it’s unlikely that it happened by chance.
  5. Insights

    Calculating the Consumption Function

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

    How Much To Save To Retire By 50

    Depending on how much you make, when you have to start and what percentage you need, how much do you need to save each paycheck to have $50, 000 a year after 50?
  7. Financial Advisor

    Turn Small Savings Into A Big Nest Egg

    Small changes to spending and saving habits can reap major rewards - with limited sacrifice.
  8. Retirement

    Saving for Retirement: Life’s Most Expensive Purchase

    Most Americans know that saving for retirement is important. So why aren't they saving more?
  9. Retirement

    Help Your Kids Start a Retirement Savings Plan

    It's never too early to save for the future - learn how your children can get started.
RELATED FAQS
  1. Under what circumstances might a merchant turn toward using a banker's acceptance?

    Understand the significance of the marginal propensity to consume, and learn which factors can lead to a change in the marginal ... Read Answer >>
  2. 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 >>
  3. 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 >>
  4. In what manner will a recession likely affect the marginal-propensity-to-save rate ...

    Learn why recessions are often accompanied by an increase in the marginal propensity to save and whether this is a concerning ... Read Answer >>
  5. What does a strong null hypothesis mean?

    Find out what null hypothesis is and why it is important to the scientific method. See how statisticians and economists use ... Read Answer >>
  6. How do I negotiate a lower annual percentage rate (APR) with my credit card company?

    Discover the main factors of economic policy that, according to Keynesian economic theory, drive the marginal propensity ... Read Answer >>
Hot Definitions
  1. Index

    A statistical measure of change in an economy or a securities market. In the case of financial markets, an index is a hypothetical ...
  2. Return on Market Value of Equity - ROME

    Return on market value of equity (ROME) is a comparative measure typically used by analysts to identify companies that generate ...
  3. Majority Shareholder

    A person or entity that owns more than 50% of a company's outstanding shares. The majority shareholder is often the founder ...
  4. Competitive Advantage

    An advantage that a firm has over its competitors, allowing it to generate greater sales or margins and/or retain more customers ...
  5. Mutual Fund

    An investment vehicle that is made up of a pool of funds collected from many investors for the purpose of investing in securities ...
  6. Wash-Sale Rule

    An Internal Revenue Service (IRS) rule that prohibits a taxpayer from claiming a loss on the sale or trade of a security ...
Trading Center