Rules of Thumb versus Dynamic Programming
AbstractThis paper studies decisionmaking with rules of thumb in the context of dynamic decision problems and compares it to dynamic programming. A rule is a fixed mapping from a subset of states into actions. Rules are compared by averaging over past experiences. This can lead to favoring rules which are only applicable in good states. Correcting this good state bias requires solving the dynamic program. The authors provide a general framework and characterize the asymptotic properties. They apply it to provide a candidate explanation for the sensitivity of consumption to transitory income.
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Bibliographic InfoArticle provided by American Economic Association in its journal American Economic Review.
Volume (Year): 89 (1999)
Issue (Month): 1 (March)
Find related papers by JEL classification:
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
- E21 - Macroeconomics and Monetary Economics - - Macroeconomics: Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
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