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Attainable Non-optimality or Unattainable Optimality: A New Approach to Stochastic Life Cycle Problems

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  • Pemberton, James

Abstract

When future income is uncertain, the standard model of stochastic life cycle behavior does not provide an operatio nal basis for consumer choice because it is too complex to be solved either analytically or intuitively by the human brain (even if computer-assisted). This paper proposes an alternative model of intertemporal decision-making that takes full account of the future, including future uncertainty, but which is analytically tractable. T he model is applied to some illustrative examples. Copyright 1993 by Royal Economic Society.

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  • Pemberton, James, 1993. "Attainable Non-optimality or Unattainable Optimality: A New Approach to Stochastic Life Cycle Problems," Economic Journal, Royal Economic Society, vol. 103(416), pages 1-20, January.
  • Handle: RePEc:ecj:econjl:v:103:y:1993:i:416:p:1-20
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    Citations

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    Cited by:

    1. Rodepeter, Ralf & Winter, Joachim, 1999. "Rules of thumb in life-cycle savings models," Papers 99-81, Sonderforschungsbreich 504.
    2. Muller, Wieland, 2001. "Strategies, heuristics, and the relevance of risk-aversion in a dynamic decision problem," Journal of Economic Psychology, Elsevier, vol. 22(4), pages 493-522, August.
    3. Binswanger, J., 2008. "Towards Understanding Life Cycle Saving Of Boundedly Rational Agents : A Model With Feasibility Goals - Replaced by CentER Discussion Paper 2010-138," Discussion Paper 2008-14, Tilburg University, Center for Economic Research.
    4. Hideaki Tamura & Yoichi Matsubayashi, 2014. "A New Solution to the Equity Premium Puzzle and the Risk-Free Rate Puzzle: Theory and Evidence," Discussion Papers 1422, Graduate School of Economics, Kobe University.
    5. Pemberton, James, 1997. "Modelling and measuring income uncertainty in life cycle models," Economic Modelling, Elsevier, vol. 14(1), pages 81-98, January.
    6. Alho, Juha M., 2014. "Forecasting demographic forecasts," International Journal of Forecasting, Elsevier, vol. 30(4), pages 1128-1135.
    7. Insong Jang, 2001. "Forward Looking Behavior And Empirical Household Consumption Function," Bonn Econ Discussion Papers bgse7_2001, University of Bonn, Germany.
    8. Binswanger, J., 2010. "Towards Understanding Life Cycle Savings of Boundedly Rational Agents : A Model with Feasibility Goals (Revision of DP 2008-14)," Discussion Paper 2010-138, Tilburg University, Center for Economic Research.
    9. 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.
    10. Binswanger, Johannes, 2012. "Life cycle saving: Insights from the perspective of bounded rationality," European Economic Review, Elsevier, vol. 56(3), pages 605-623.

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