Individual Learning About Consumption / Todd W. Allen, Christopher D. Carroll.

Format:

Book

Author/Creator:

Allen, Todd W.

Contributor:

National Bureau of Economic Research.

Carroll, Christopher D.

Series:

Working Paper Series (National Bureau of Economic Research) no. w8234.

NBER working paper series no. w8234

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2001.

Summary:

The standard approach to modelling consumption/saving problems is to assume that the decisionmaker is solving a dynamic stochastic optimization problem. However, under realistic descriptions of utility and uncertainty, the optimal consumption/saving decision is so difficult that only recently have economists have managed to find solutions, using numerical methods that require previously infeasible amounts of computation. Yet empirical evidence suggests that household behavior conforms fairly well with the prescriptions of the optimal solution, raising the question of how average households can solve problems that economists, until recently, could not. This paper examines whether consumers might be able to find a reasonably good 'rule-of-thumb' approximation to optimal behavior by trial-and-error methods, as Friedman (1953) proposed long ago. We find that such individual learning methods can reliably identify reasonably good rules of thumb only if the consumer is able to spend absurdly large amounts of time searching for a good rule.

Notes:

Print version record

April 2001.