Individual Learning About Consumption

Todd W. Allen and Christopher Carroll

No 8234, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: C6 D1 (search for similar items in EconPapers)
Date: 2001-04
Note: ME
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (48)

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.

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Journal Article: INDIVIDUAL LEARNING ABOUT CONSUMPTION (2001)
Working Paper: Individual Learning About Consumption (2001)
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