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Memory Utility

Author

Listed:
  • Itzhak Gilboa

    (University of Tel Aviv)

  • Andrew Postlewaite

    (Department of Economics, University of Pennsylvania)

  • Larry Samuelson

    (Yale University and HEC Paris)

Abstract

People often consume non-durable goods in a way that seems inconsistent with preferences for smoothing consumption over time. We suggest that such patterns of consumption can be better explained if one takes into account the memories that consumption generates. A memorable good, such as a honeymoon or a vacation, is a good whose mental consumption outlives its physical consumption. We consider a model in which a consumer enjoys physical consumption as well as memories. Memories are generated only by some goods, and only when their consumption exceeds customary levels by a sufficient margin. We offer axiomatic foundations for the structure of the utility function and study optimal consumption in a dynamic model. The model shows how rational consumers, taking into account their future memories, would make optimal choices that rationalize lumpy patterns of consumption.

Suggested Citation

  • Itzhak Gilboa & Andrew Postlewaite & Larry Samuelson, 2015. "Memory Utility," PIER Working Paper Archive 15-005, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
    • Handle: RePEc:pen:papers:15-005
    as

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    References listed on IDEAS

    as
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    6. Sundaram,Rangarajan K., 1996. "A First Course in Optimization Theory," Cambridge Books, Cambridge University Press, number 9780521497190.
    7. Rong Hai & Andrew Postlewaite & Dirk Krueger, 2013. "On the Welfare Cost of Consumption Fluctuations in the Presence of Memorable Goods, Second Version," PIER Working Paper Archive 14-012, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 15 Apr 2014.
    8. Becker, Gary S & Murphy, Kevin M, 1988. "A Theory of Rational Addiction," Journal of Political Economy, University of Chicago Press, vol. 96(4), pages 675-700, August.
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    Full references (including those not matched with items on IDEAS)

    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. When biases collide
      by chris in Stumbling and Mumbling on 2015-03-04 20:17:54
    2. Fear of freedom
      by chris in Stumbling and Mumbling on 2015-04-06 16:38:02
    3. How much should millenials save?
      by chris in Stumbling and Mumbling on 2016-02-17 18:52:53

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    More about this item

    Keywords

    Memorable goods; memory utility; consumption smoothing;
    All these keywords.

    JEL classification:

    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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