Thursday, July 9, 2009

Do people behave optimally?

As an economist, I want to believe that people optimize well, but I still have a lot of doubts. We know that people don't do a lot of things well, like planing for future health problems or randomizing numbers in their head.

Two new papers give evidence that people are in fact more rational than we think.

David Levine argues that behavioral economics is not the solution to all of our problems. In fact, the rational model is quite good for most people (HT to Cheap Talk).

Then there's Fed economist Laurie Pounder, who presents evidence that consumption smoothing (my favorite pastime) does in fact exist: "Households with high expected future income spend more today than households that have lower future income but identical current income and net worth. Omitting household-specific future income can cause mis-estimation of key consumption questions" (HT to Stumbling and Mumbling).

I will stay skeptical, but I appreciate the evidence that we act rationally more often than some of us might think.

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