Towards Understanding Life Cycle Saving of Boundedly Rational Agents: A Model with Feasibility Goals
CentER Discussion Paper Series No. 2010-138 (revision of 2008-14)
50 Pages Posted: 13 Feb 2008 Last revised: 16 Jan 2011
Date Written: December 9, 2010
Abstract
This paper develops a new life cycle model that aims to describe the savings and asset allocation choices of boundedly rational agents. In this model, agents make forward-looking decisions without the requirement of anticipating their actual future decisions. Instead, agents pursue two simple so-called feasibility goals. The first goal entails assuring feasibility of a certain minimum consumption level in a future worst-case scenario. The second concerns feasibility of a certain standard of living in a normal scenario. The feasibility goals framework represents a particularly natural alternative to the standard rational benchmark model. The framework is highly tractable and parsimonious. In particular, it is able to explain important empirical patterns of asset allocation that are puzzling from the point of view of existing models.
Keywords: Behavioral economics, bounded rationality, equity shares, feasibility goals, life cycle saving, stock market participation.
JEL Classification: D81, D91
Suggested Citation: Suggested Citation
Do you have negative results from your research you’d like to share?
Recommended Papers
-
Optimal Portfolio Choice for Long-Horizon Investors with Nontradable Labor Income
-
Down or Out: Assessing the Welfare Costs of Household Investment Mistakes
By Laurent E. Calvet, John Y. Campbell, ...
-
Down or Out: Assessing the Welfare Costs of Household Investment Mistakes
By Laurent E. Calvet, John Y. Campbell, ...
-
Hedging, Familiarity and Portfolio Choice
By Massimo Massa and Andrei Simonov
-
Optimal Life-Cycle Asset Allocation: Understanding the Empirical Evidence
-
Optimal Life-Cycle Asset Allocation: Understanding the Empirical Evidence
-
Investing Retirement Wealth: a Life-Cycle Model
By John Y. Campbell, Joao F. Cocco, ...