Towards Understanding Life Cycle Savings of Boundedly Rational Agents: A Model with Feasibility Goals (Revision of DP 2008-14)
AbstractThis paper develops a new life cycle model that aims to describe the savings and asset allocation choices of boundedly rational agents. In this model, agents make forward-looking decisions without the requirement of anticipating their actual future decisions. Instead, agents pursue two simple so-called feasibility goals. The first goal entails assuring feasibility of a certain minimum consumption level in a future worst-case scenario. The second concerns feasibility of a certain standard of living in a normal scenario. The feasibility goals framework represents a particularly natural alternative to the standard rational benchmark model. The framework is highly tractable and parsimonious. In particular, it is able to explain important empirical patterns of asset allocation that are puzzling from the point of view of existing models.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2010-138.
Date of creation: 2010
Date of revision:
Contact details of provider:
Web page: http://center.uvt.nl
Behavioral economics; bounded rationality; contingent planning; feasibility goals; life cycle saving; portfolio choice;
Find related papers by JEL classification:
- D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
- D91 - Microeconomics - - Intertemporal Choice - - - Intertemporal Household Choice; Life Cycle Models and Saving
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Gomes, Francisco J & Michaelides, Alexander, 2005.
"Optimal Life-Cycle Asset Allocation: Understanding the Empirical Evidence,"
CEPR Discussion Papers
4853, C.E.P.R. Discussion Papers.
- Francisco Gomes & Alexander Michaelides, 2005. "Optimal Life-Cycle Asset Allocation: Understanding the Empirical Evidence," Journal of Finance, American Finance Association, vol. 60(2), pages 869-904, 04.
- Gomes, Francisco J & Michaelides, Alexander, 2003.
"Portfolio Choice with Internal Habit Formation: A Life-Cycle Model with Uninsurable Labour Income Risk,"
CEPR Discussion Papers
3868, C.E.P.R. Discussion Papers.
- Francisco Gomes & Alexander Michaelides, 2003. "Portfolio Choice With Internal Habit Formation: A Life-Cycle Model With Uninsurable Labor Income Risk," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 6(4), pages 729-766, October.
- David I. Laibson & Xavier Gabaix, 2000. "A Boundedly Rational Decision Algorithm," American Economic Review, American Economic Association, vol. 90(2), pages 433-438, May.
- Binswanger, Johannes, 2007. "Risk management of pensions from the perspective of loss aversion," Journal of Public Economics, Elsevier, vol. 91(3-4), pages 641-667, April.
- Luigi Guiso & Tullio Jappelli, 2000.
"Household Portfolios in Italy,"
CSEF Working Papers
43, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
- Valery Polkovnichenko, 2007. "Life-Cycle Portfolio Choice with Additive Habit Formation Preferences and Uninsurable Labor Income Risk," Review of Financial Studies, Society for Financial Studies, vol. 20(1), pages 83-124, January.
- Bowman, David & Minehart, Deborah & Rabin, Matthew, 1999.
"Loss aversion in a consumption-savings model,"
Journal of Economic Behavior & Organization,
Elsevier, vol. 38(2), pages 155-178, February.
- João Cocco & Francisco Gomes & Pascal Maenhout, 1998. "Consumption and Portfolio Choice over the Life-Cycle," Center for Economic Studies - Discussion papers ces9805, Katholieke Universiteit Leuven, Centrum voor Economische Studiën.
- David I. Laibson & Andrea Repetto & Jeremy Tobacman, 1998. "Self-Control and Saving for Retirement," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(1), pages 91-196.
- Andrew E. Clark & Paul Frijters & Michael A. Shields, 2008.
"Relative Income, Happiness, and Utility: An Explanation for the Easterlin Paradox and Other Puzzles,"
Journal of Economic Literature,
American Economic Association, vol. 46(1), pages 95-144, March.
- Clark, Andrew E. & Frijters, Paul & Shields, Michael A., 2007. "Relative Income, Happiness and Utility: An Explanation for the Easterlin Paradox and Other Puzzles," IZA Discussion Papers 2840, Institute for the Study of Labor (IZA).
- Binswanger, Johannes, 2010. "Understanding the heterogeneity of savings and asset allocation: A behavioral-economics perspective," Journal of Economic Behavior & Organization, Elsevier, vol. 76(2), pages 296-317, November.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Richard Broekman).
If references are entirely missing, you can add them using this form.