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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Paper provided by The Johns Hopkins University,Department of Economics in its series Economics Working Paper Archive with number
444.
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Emilio Fernandez-Corugedo, 2004.
"Consumption Theory,"
Handbooks,
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James Feigenbaum & Frank N. Caliendo & Emin Gahramanov, 2009.
"Optimal Irrational Behavior,"
Economics Series
2009_01, Deakin University, Faculty of Business and Law, School of Accounting, Economics and Finance.
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Other versions:
James Feigenbaum & Frank Caliendo & Emin Gahramanov, 2008.
"Optimal Irrational Behavior,"
Working Papers
368, University of Pittsburgh, Department of Economics, revised Sep 2008.
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James Feigenbaum & Frank N. Caliendo & Emin Gahramanov, 2009.
"Optimal Irrational Behavior,"
Working Papers
200901, Utah State University, Department of Economics and Finance.
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