Advanced Search
MyIDEAS: Login to save this paper or follow this series

Individual Learning About Consumption

Contents:

Author Info

  • 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 have 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.

Download Info

If 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.
File URL: http://www.nber.org/papers/w8234.pdf
Download Restriction: no

Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8234.

as in new window
Length:
Date of creation: Apr 2001
Date of revision:
Publication status: published as Allen, Todd W. & Carroll, Christopher D., 2001. "Individual Learning About Consumption," Macroeconomic Dynamics, Cambridge University Press, vol. 5(02), pages 255-271, April.
Handle: RePEc:nbr:nberwo:8234

Note: ME
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Phone: 617-868-3900
Email:
Web page: http://www.nber.org
More information through EDIRC

Related research

Keywords:

Other versions of this item:

Find related papers by JEL classification:

References

References listed on IDEAS
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.:
as in new window
  1. Christopher D. Carroll, 1996. "Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis," NBER Working Papers 5788, National Bureau of Economic Research, Inc.
  2. Carroll, Christopher D & Kimball, Miles S, 1996. "On the Concavity of the Consumption Function," Econometrica, Econometric Society, Econometric Society, vol. 64(4), pages 981-92, July.
  3. Kreps,David M. & Wallis,Kenneth F. (ed.), 1997. "Advances in Economics and Econometrics: Theory and Applications," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521589826.
  4. Christopher D. Carroll, 1997. "Death to the Log-Linearized Consumption Euler Equation! (And Very Poor Health to the Second-Order Approximation)," NBER Working Papers 6298, National Bureau of Economic Research, Inc.
  5. Christopher D. Carroll, 1992. "How does future income affect current consumption?," Working Paper Series / Economic Activity Section, Board of Governors of the Federal Reserve System (U.S.) 126, Board of Governors of the Federal Reserve System (U.S.).
  6. Nicholas S. Souleles, 1999. "The Response of Household Consumption to Income Tax Refunds," American Economic Review, American Economic Association, American Economic Association, vol. 89(4), pages 947-958, September.
  7. Zeldes, Stephen P, 1989. "Optimal Consumption with Stochastic Income: Deviations from Certainty Equivalence," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 104(2), pages 275-98, May.
  8. Gourinchas, Pierre-Olivier & Parker, Jonathan A, 2000. "Consumption Over the Life-Cycle," CEPR Discussion Papers, C.E.P.R. Discussion Papers 2345, C.E.P.R. Discussion Papers.
  9. Martin Browning & Annamaria Lusardi, 1996. "Household Saving: Micro Theories and Micro Facts," Discussion Papers 96-01, University of Copenhagen. Department of Economics.
  10. Angus Deaton, 1989. "Saving and Liquidity Constraints," NBER Working Papers 3196, National Bureau of Economic Research, Inc.
  11. Kreps,David M. & Wallis,Kenneth F. (ed.), 1997. "Advances in Economics and Econometrics: Theory and Applications," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521589833.
  12. Lettau, Martin, 1997. "Explaining the facts with adaptive agents: The case of mutual fund flows," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 21(7), pages 1117-1147, June.
  13. Gale, Douglas, 1996. "What have we learned from social learning?," European Economic Review, Elsevier, Elsevier, vol. 40(3-5), pages 617-628, April.
  14. Kreps,David M. & Wallis,Kenneth F. (ed.), 1997. "Advances in Economics and Econometrics: Theory and Applications," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521589819.
  15. Glenn R. Hubbard & Jonathan Skinner & Stephen P. Zeldes, . "Precautionary Saving and Social Insurance," Rodney L. White Center for Financial Research Working Papers, Wharton School Rodney L. White Center for Financial Research 3-95, Wharton School Rodney L. White Center for Financial Research.
  16. R. Glenn Hubbard & Jonathan Skinner & Stephen P. Zeldes, 1993. "The Importance of Precautionary Motives in Explaining Individual and Aggregate Saving," NBER Working Papers 4516, National Bureau of Economic Research, Inc.
  17. Christopher D. Carroll, 2001. "A Theory of the Consumption Function, with and without Liquidity Constraints," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 15(3), pages 23-45, Summer.
  18. McCarthy, Jonathan, 1995. "Imperfect insurance and differing propensities to consume across households," Journal of Monetary Economics, Elsevier, Elsevier, vol. 36(2), pages 301-327, November.
  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. Jonathan A. Parker, 1999. "The Reaction of Household Consumption to Predictable Changes in Social Security Taxes," American Economic Review, American Economic Association, American Economic Association, vol. 89(4), pages 959-973, September.
  21. 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, American Economic Association, vol. 12(3), pages 151-170, Summer.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Isabelle Salle & Pascal Seppecher, 2013. "Social Learning about Consumption," Working Papers, HAL hal-00989233, HAL.
  2. James Feigenbaum, 2008. "Optimal Irrational Behavior," Working Papers, University of Pittsburgh, Department of Economics 368, University of Pittsburgh, Department of Economics, revised Sep 2008.
  3. Binswanger, Johannes, 2011. "Dynamic decision making with feasibility goals: A procedural-rationality approach," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 78(3), pages 219-228, May.
  4. Stephen, Wu & Joel, Shapiro, 2010. "Fatalism and Savings," MPRA Paper 24852, University Library of Munich, Germany.
  5. 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.
  6. Georges, Christophre & Wallace, John C., 2009. "Learning Dynamics And Nonlinear Misspecification In An Artificial Financial Market," Macroeconomic Dynamics, Cambridge University Press, Cambridge University Press, vol. 13(05), pages 625-655, November.
  7. Christopher D. Carroll, 2001. "A Theory of the Consumption Function, with and without Liquidity Constraints," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 15(3), pages 23-45, Summer.
  8. Binswanger, Johannes, 2012. "Life cycle saving: Insights from the perspective of bounded rationality," European Economic Review, Elsevier, Elsevier, vol. 56(3), pages 605-623.
  9. Emilio Fernandez-Corugedo, 2004. "Consumption Theory," Handbooks, Centre for Central Banking Studies, Bank of England, Centre for Central Banking Studies, Bank of England, number 23.
  10. Peter Howitt & Ömer Özak, 2009. "Adaptive Consumption Behavior," NBER Working Papers 15427, National Bureau of Economic Research, Inc.
  11. Tokuoka, Kiichi, 2013. "Saving response to unemployment of a sibling," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 89(C), pages 58-75.
  12. Fazzari, Steven & Ferri, Piero & Greenberg, Edward, 2008. "Cash flow, investment, and Keynes-Minsky cycles," Journal of Economic Behavior & Organization, Elsevier, Elsevier, vol. 65(3-4), pages 555-572, March.
  13. Ann L. Owen & Elizabeth J. Jensen, 2008. "Social Learning and Course Choice," International Review of Economic Education, Economics Network, University of Bristol, Economics Network, University of Bristol, vol. 7(1), pages 9-35.
  14. T. Parker Ballinger & Michael G. Palumbo & Nathaniel T. Wilcox, 2003. "Precautionary saving and social learning across generations: an experiment," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 113(490), pages 920-947, October.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:8234. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.