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Individual Learning About Consumption

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Author Info
Todd W. Allen
Christopher D. Carroll

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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.

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

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Date of creation: Apr 2001
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Handle: RePEc:nbr:nberwo:8234

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Find related papers by JEL classification:
C6 - Mathematical and Quantitative Methods - - Mathematical Methods and Programming
D1 - Microeconomics - - Household Behavior

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  1. Emilio Fernandez-Corugedo, 2004. "Consumption Theory," Handbooks, Centre for Central Banking Studies, Bank of England, number 23. [Downloadable!]
  2. 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. [Downloadable!] (restricted)
    Other versions:
  3. 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. [Downloadable!]
  4. Peter Howitt & Ömer Özak, 2009. "Adaptive Consumption Behavior," NBER Working Papers 15427, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  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. [Downloadable!]
  6. 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. [Downloadable!]
    Other versions:
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