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Rule of Thumb and Dynamic Programming

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Author Info

  • Lettau, M.
  • Uhlig, H.

    (Tilburg University, Center for Economic Research)

Abstract

This paper studies the relationships between learning about rules of thumb (represented by classifier systems) and dynamic programming. Building on a result about Markovian stochastic approximation algorithms, we characterize all decision functions that can be asymptotically obtained through classifier system learning, provided the asymptotic ordering of the classifiers is strict. We demonstrate in a robust example that the learnable decision function is in general not unique, not characterized by a strict ordering of the classifiers, and may not coincide with the decision function delivered by the solution to the dynamic programming problem even if that function is attainable. As an illustration we consider the puzzle of excess sensitivity of consumption to transitory income: classifier systems can generate such behavior even if one of the available rules of thumb is the decision function solving the dynamic programming problem, since bad decisions in good times can "feel better" than good decisions in bad times.

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 1995-27.

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Date of creation: 1995
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Handle: RePEc:dgr:kubcen:199527

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Web page: http://center.uvt.nl

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References

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  1. Laibson, David, 1997. "Golden Eggs and Hyperbolic Discounting," The Quarterly Journal of Economics, MIT Press, vol. 112(2), pages 443-77, May.
  2. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-54, August.
  3. Robert E. Hall & Frederic S. Mishkin, 1982. "The Sensitivity of Consumption to Transitory Income: Estimates from Panel Data on Households," NBER Working Papers 0505, National Bureau of Economic Research, Inc.
  4. Stephen Zeldes, . "Consumption and Liquidity Constraints: An Empirical Investigation," Rodney L. White Center for Financial Research Working Papers 24-85, Wharton School Rodney L. White Center for Financial Research.
  5. Ingram, Beth Fisher, 1990. "Equilibrium Modeling of Asset Prices: Rationality versus Rules of Thumb," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(1), pages 115-25, January.
  6. Marimon, Ramon & McGrattan, Ellen & Sargent, Thomas J., 1990. "Money as a medium of exchange in an economy with artificially intelligent agents," Journal of Economic Dynamics and Control, Elsevier, vol. 14(2), pages 329-373, May.
  7. Flavin, Marjorie A, 1981. "The Adjustment of Consumption to Changing Expectations about Future Income," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 974-1009, October.
  8. Chris Carroll & Lawrence H. Summers, 1989. "Consumption Growth Parallels Income Growth: Some New Evidence," NBER Working Papers 3090, National Bureau of Economic Research, Inc.
  9. Taylor, John B & Uhlig, Harald, 1990. "Solving Nonlinear Stochastic Growth Models: A Comparison of Alternative Solution Methods," Journal of Business & Economic Statistics, American Statistical Association, vol. 8(1), pages 1-17, January.
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Cited by:
  1. Erdem Basci & Mehmet Orhan, 1999. "Reinforcement Learning and Dynamic Optimization," Departmental Working Papers 998, Bilkent University, Department of Economics.
  2. Erdem Basci, 1998. "Learning by Imitation in the Kiyotaki-Wright Model of Money," Departmental Working Papers 9818, Bilkent University, Department of Economics.

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