Individual Learning About Consumption

Todd W Allen and Christopher Carroll ()

Economics Working Paper Archive from The Johns Hopkins University,Department of Economics

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 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

Date: 2001-03
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Working Paper: Individual Learning About Consumption (2001)
Journal Article: INDIVIDUAL LEARNING ABOUT CONSUMPTION (2001)
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Persistent link: http://EconPapers.repec.org/RePEc:jhu:papers:444

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