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Heuristics as Decision Rules - Part I: The Cobb Douglas Consumer

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Author Info

  • Werner Güth

    (Humboldt University Berlin)

  • Wilhelm Neuefeind

    (Washington University in St.\Louis)

Abstract

Many consumption prices are highly volatile. It would certainly overburden our cognitive system to fully adjust to all these changes. Households therefore often rely on simple heuristics when deciding what to consume, e.g. in the form of a constant budget share for a specific consumption commodity, like a vacation, or of a constant consumption amount for low-cost commodities as food items. Using utility functions we can measure the welfare loss, caused by such heuristics, and to what extent this can be reduced by adaptation. In the present Part I the analysis is mainly restricted to a single consumer with a Cobb-Douglas utility function. General utility functions will also be considered. Part II will study exchange economies

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Bibliographic Info

Article provided by Institute of SocioEconomics in its journal Homo Oeconomicus.

Volume (Year): 18 (2001)
Issue (Month): ()
Pages: 177-197

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Handle: RePEc:hom:homoec:v:18:y:2001:p:177-197

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