Individual learning about consumption

Citation
Tw. Allen et Cd. Carroll, Individual learning about consumption, MACROECON D, 5(2), 2001, pp. 255-271
Citations number
36
Language
INGLESE
art.tipo
Article
Categorie Soggetti
Economics
Journal title
MACROECONOMIC DYNAMICS
ISSN journal
1365-1005 → ACNP
Volume
5
Issue
2
Year of publication
2001
Pages
255 - 271
Database
ISI
SICI code
1365-1005(200104)5:2<255:ILAC>2.0.ZU;2-3
Abstract
The standard approach to modeling 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 opt imal consumption/saving decision is so difficult that only recently have ec onomists managed to fmd solutions, using numerical methods that require pre viously 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 w hether consumers might be able to find a reasonably good rule-of-thumb appr oximation to optimal behavior by trial-and-error methods, as Milton Friedma n proposed long ago. We find that such individual learning methods can reli ably identify reasonably good rules of thumb only if the consumer is able t o spend absurdly large amounts of time searching for a good rule.