The Life-Cycle Hypothesis (LCH) is an economic theory developed in the early 1950s by Franco Modigliani and Richard Brumberg to explain how people plan their spending over the course of their lives. This theory is based on the idea that people plan their spending, taking into account future income and preferring a smooth level of consumption throughout their lifetime. The LCH is most applicable for young people who need to build up saving for retirement, or for those nearing the end of their working lives who need to draw down their savings.

The graph of a person's wealth over the lifetime, as modeled by the LCH, is hump-shaped. This means that during the beginning and end of life, wealth is low as people save up or draw down their savings. In the middle of life, wealth tends to be its highest as people are in the midst of their working careers and have a steady flow of income. This suggests that younger individuals have a relatively greater capacity to take investment risks, because they are not yet relying on their accumulated savings.

In addition to the suggestion that younger individuals can take more risks, the LCH also implies that borrowing money early in life could raise consumption in the present. By using leverage, individuals can keep consumption constant over their lifetime, while relying on future income to pay off their debt. This is a trade-off that could potentially provide greater utility in the present at the cost of higher debt and risk taking.

The LCH has important implications for economic policy, as it suggests that individuals do in fact plan for the future. Tax stability and retirement policies become critically important for ensuring the efficient operation of the life-cycle theory. Governments may need to provide incentives, such as retirement plans and inheritance tax rules, to encourage and enable individuals to save for the future. Overall, the Life-Cycle Hypothesis is an important economic idea that has been applied in many realms of the financial world. It suggests that individuals are forward-looking and capable of planning for their retirement years. This model has allowed academics and investors alike to better understand human behavior when it comes to spending decisions, and should be taken into consideration when constructing economic policies.