Rules of thumb in life-cycle savings models


Rodepeter, Ralf ; Winter, Joachim


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URL: http://ub-madoc.bib.uni-mannheim.de/2835
URN: urn:nbn:de:bsz:180-madoc-28354
Document Type: Working paper
Year of publication: 1999
Publication language: English
Institution: School of Law and Economics > Sonstige - Fakultät für Rechtswissenschaft und Volkswirtschaftslehre
MADOC publication series: Sonderforschungsbereich 504 > Rationalitätskonzepte, Entscheidungsverhalten und ökonomische Modellierung (Laufzeit 1997 - 2008)
Subject: 330 Economics
Classification: JEL: D91 E21 ,
Subject headings (SWD): Sparen , Lebenszyklus <Wirtschaft> , Konsumtheorie , Zeitpräferenz , Eingeschränkte Rationalität , Einkommenshypothese , Entscheidung bei Unsicherheit
Keywords (English): savings , life-cycle models , bounded rationality , rules of thumb
Abstract: We analyze life-cycle savings decisions when households use simple heuristics, or rules of thumb, rather than solve the underlying intertemporal optimization problem. The decision rules we explore are a simple Keynesian rule where consumption follows income; a simple consumption rule where only a fraction of positive income shocks is saved; a rule that corresponds to the permanent income hypothesis; and two rules that have been found in experimental studies. Using these rules, we simulate life-cycle savings decisions numerically and compute the utility losses relative to the backwards solution of the intertemporal optimization problem. Our central finding is that the utility losses induced by rule-of-thumb behavior are relatively low. We conclude that behaving optimally, in the sense of solving an intertemporal optimization model, is not only costly, it is also not much better than using simple heuristics. Our results might also explain why optimization models typically fit the main features of empirical data quite well although optimizing behavior itself is frequently rejected.
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Rodepeter, Ralf ; Winter, Joachim (1999) Rules of thumb in life-cycle savings models. Open Access [Working paper]
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