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Individual Learning About Consumption

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  • Todd W Allen
  • Christopher D Carroll

Abstract

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 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

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Bibliographic Info

Paper provided by The Johns Hopkins University,Department of Economics in its series Economics Working Paper Archive with number 444.

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Date of creation: Mar 2001
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Handle: RePEc:jhu:papers:444

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References

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  1. Christopher D. Carroll & Miles S. Kimball, 1995. "On the Concavity of the Consumption Function," Macroeconomics 9503003, EconWPA.
  2. Deaton, A., 1989. "Saving And Liquidity Constraints," Papers 153, Princeton, Woodrow Wilson School - Public and International Affairs.
  3. Zeldes, Stephen P, 1989. "Optimal Consumption with Stochastic Income: Deviations from Certainty Equivalence," The Quarterly Journal of Economics, MIT Press, vol. 104(2), pages 275-98, May.
  4. Pierre-Olivier Gourinchas & Jonathan A. Parker, 1999. "Consumption Over the Life Cycle," NBER Working Papers 7271, National Bureau of Economic Research, Inc.
  5. Christopher D. Carroll, 2001. "A Theory of the Consumption Function, with and without Liquidity Constraints," Journal of Economic Perspectives, American Economic Association, vol. 15(3), pages 23-45, Summer.
  6. Christopher D Carroll, 1997. "Death to the Log-Linearized Consumption euler Equation! (And Very Poor Health to the Second-Order Approximation)," Economics Working Paper Archive 390, The Johns Hopkins University,Department of Economics.
  7. McCarthy, Jonathan, 1995. "Imperfect insurance and differing propensities to consume across households," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 301-327, November.
  8. Jonathan A. Parker, 1999. "The Reaction of Household Consumption to Predictable Changes in Social Security Taxes," American Economic Review, American Economic Association, vol. 89(4), pages 959-973, September.
  9. Kreps,David M. & Wallis,Kenneth F. (ed.), 1997. "Advances in Economics and Econometrics: Theory and Applications," Cambridge Books, Cambridge University Press, number 9780521589826.
  10. Hubbard, R. Glenn & Skinner, Jonathan & Zeldes, Stephen P., 1994. "The importance of precautionary motives in explaining individual and aggregate saving," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 40(1), pages 59-125, June.
  11. Carroll, Christopher D, 1994. "How Does Future Income Affect Current Consumption?," The Quarterly Journal of Economics, MIT Press, vol. 109(1), pages 111-47, February.
  12. Sushil Bikhchandani & David Hirshleifer & Ivo Welch, 1998. "Learning from the Behavior of Others: Conformity, Fads, and Informational Cascades," Journal of Economic Perspectives, American Economic Association, vol. 12(3), pages 151-170, Summer.
  13. Martin Browning & Annamaria Lusardi, 1995. "Household Saving: Micro Theories and Micro Facts," Department of Economics Working Papers 1995-02, McMaster University.
  14. Nicholas S. Souleles, 1999. "The Response of Household Consumption to Income Tax Refunds," American Economic Review, American Economic Association, vol. 89(4), pages 947-958, September.
  15. R. Glenn Hubbard & Jonathan Skinner & Stephen P. Zeldes, 1994. "Precautionary Saving and Social Insurance," NBER Working Papers 4884, National Bureau of Economic Research, Inc.
  16. Lettau, Martin, 1997. "Explaining the facts with adaptive agents: The case of mutual fund flows," Journal of Economic Dynamics and Control, Elsevier, vol. 21(7), pages 1117-1147, June.
  17. Carroll, Christopher D, 1997. "Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis," The Quarterly Journal of Economics, MIT Press, vol. 112(1), pages 1-55, February.
  18. Kreps,David M. & Wallis,Kenneth F. (ed.), 1997. "Advances in Economics and Econometrics: Theory and Applications," Cambridge Books, Cambridge University Press, number 9780521589819.
  19. Christopher D. Carroll, 1992. "The Buffer-Stock Theory of Saving: Some Macroeconomic Evidence," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 23(2), pages 61-156.
  20. Kreps,David M. & Wallis,Kenneth F. (ed.), 1997. "Advances in Economics and Econometrics: Theory and Applications," Cambridge Books, Cambridge University Press, number 9780521589833.
  21. Gale, Douglas, 1996. "What have we learned from social learning?," European Economic Review, Elsevier, vol. 40(3-5), pages 617-628, April.
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Citations

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Cited by:
  1. Feigenbaum, James & Caliendo, Frank N. & Gahramanov, Emin, 2011. "Optimal irrational behavior," Journal of Economic Behavior & Organization, Elsevier, vol. 77(3), pages 285-303, March.
  2. Ann L. Owen & Elizabeth J. Jensen, 2008. "Social Learning and Course Choice," International Review of Economic Education, Economics Network, University of Bristol, vol. 7(1), pages 9-35.
  3. Isabelle Salle & Pascal Seppecher, 2013. "Social Learning about Consumption," Working Papers hal-00989233, HAL.
  4. Alexander L. Brown & Colin F. Camerer & Zhikang Eric Chua, 2006. "Learning and Visceral Temptation in Dynamic Savings Experiments," Levine's Bibliography 321307000000000048, UCLA Department of Economics.
  5. Fazzari, Steven & Ferri, Piero & Greenberg, Edward, 2008. "Cash flow, investment, and Keynes-Minsky cycles," Journal of Economic Behavior & Organization, Elsevier, vol. 65(3-4), pages 555-572, March.
  6. T. Parker Ballinger & Michael G. Palumbo & Nathaniel T. Wilcox, 2003. "Precautionary saving and social learning across generations: an experiment," Economic Journal, Royal Economic Society, vol. 113(490), pages 920-947, October.
  7. Georges, Christophre & Wallace, John C., 2009. "Learning Dynamics And Nonlinear Misspecification In An Artificial Financial Market," Macroeconomic Dynamics, Cambridge University Press, vol. 13(05), pages 625-655, November.
  8. Binswanger, Johannes, 2011. "Dynamic decision making with feasibility goals: A procedural-rationality approach," Journal of Economic Behavior & Organization, Elsevier, vol. 78(3), pages 219-228, May.
  9. Stephen, Wu & Joel, Shapiro, 2010. "Fatalism and Savings," MPRA Paper 24852, University Library of Munich, Germany.
  10. Emilio Fernandez-Corugedo, 2004. "Consumption Theory," Handbooks, Centre for Central Banking Studies, Bank of England, number 23.
  11. Binswanger, Johannes, 2012. "Life cycle saving: Insights from the perspective of bounded rationality," European Economic Review, Elsevier, vol. 56(3), pages 605-623.
  12. Christopher D. Carroll, 2001. "A Theory of the Consumption Function, with and without Liquidity Constraints," Journal of Economic Perspectives, American Economic Association, vol. 15(3), pages 23-45, Summer.
  13. Howitt, Peter & Özak, Ömer, 2014. "Adaptive consumption behavior," Journal of Economic Dynamics and Control, Elsevier, vol. 39(C), pages 37-61.
  14. Tokuoka, Kiichi, 2013. "Saving response to unemployment of a sibling," Journal of Economic Behavior & Organization, Elsevier, vol. 89(C), pages 58-75.

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