Friday, June 12, 2009

Rational actors?

In past posts we have discussed the shortcomings of the rational actor paradimg and the challenge that behavioral economics poses to traditional benefit-cost analysis. Now we have some evidence that consumers are not as dumb as we thought they were, particularly when making inter-temporal tradeoffs between current and future consumption. In particular, consumers do NOT count chickens before they hatch:
Households with high measured risk aversion consume less out of future income. All households, on average, consume more out of the more predictable sources of future income, such as future Social Security benefits.

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