A Simple Bounded-Rationality Life Cycle Model

J. Binswanger

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Abstract

Life cycle saving decisions belong to the most complex financial decisions that we are faced with in our life. Psychologists have found that when making complex decisions people use short-cuts in the form of minimum requirements for particular attribute categories of choice options. This paper presents a new simple life cycle model where agents do invoke such minimum requirements. The model is highly tractable and parsimonious. Calibrations show that it allows us to better understand important data on saving and asset allocation. It is shown that the model is much better able to explain these data than standard workhorse models even when generously controlling for subtle differences in the “degrees of freedom” between the new and existing models.
Original languageEnglish
Place of PublicationTilburg
PublisherMacroeconomics
Number of pages44
Volume2008-13
Publication statusPublished - 2008

Publication series

NameCentER Discussion Paper
Volume2008-13

Keywords

  • Asset allocation
  • behavioral economics
  • bounded rationality
  • life cycle saving
  • noncompensatory decision making
  • threshold goals

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    Binswanger, J. (2008). A Simple Bounded-Rationality Life Cycle Model. (CentER Discussion Paper; Vol. 2008-13). Macroeconomics.