Individual Learning About Consumption

20 Pages Posted: 13 Apr 2001 Last revised: 21 Oct 2010

See all articles by Todd W. Allen

Todd W. Allen

PriceWaterhouseCoopers LLP - New York Office

Christopher D. Carroll

Johns Hopkins University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: April 2001

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.

Suggested Citation

Allen, Todd W. and Carroll, Christopher D., Individual Learning About Consumption (April 2001). NBER Working Paper No. w8234, Available at SSRN: https://ssrn.com/abstract=266763

Todd W. Allen (Contact Author)

PriceWaterhouseCoopers LLP - New York Office ( email )

1301 Avenue of the Americas
New York, NY 10019
United States

Christopher D. Carroll

Johns Hopkins University - Department of Economics ( email )

3400 Charles Street
Baltimore, MD 21218-2685
United States
410-516-7602 (Phone)
303-845-7533 (Fax)

National Bureau of Economic Research (NBER)

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Cambridge, MA 02138
United States

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