Economic Agents as Imperfect Problem Solvers

No 27820, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We develop a tractable model of limited cognitive perception of the optimal policy function, with agents using costly reasoning effort to update beliefs about this optimal mapping of economic states into actions. A key result is that agents reason less (more) when observing usual (unusual) states, producing state- and history-dependent behavior. Our application is a standard incomplete markets model with ex-ante identical agents that hold no a-priori behavioral biases. The resulting ergodic distribution of actions and beliefs is characterized by “learning traps”, where locally stable dynamics of wealth generate “familiar” regions of the state space within which behavior appears to follow past-experience-based heuristics. We show qualitatively and quantitatively how these traps have empirically desirable properties: the marginal propensity to consume is higher, hand-to-mouth status is more frequent and persistent, and there is more wealth inequality than in the standard model.

JEL-codes: C11 D83 D91 E21 E71 (search for similar items in EconPapers)
Date: 2020-09
New Economics Papers: this item is included in nep-evo, nep-mac, nep-mic and nep-ore
Note: EFG ME
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Citations: View citations in EconPapers (12)

Published as Cosmin Ilut & Rosen Valchev, 2022. "Economic Agents as Imperfect Problem Solvers," The Quarterly Journal of Economics, vol 138(1), pages 313-362.

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Working Paper: Economic Agents as Imperfect Problem Solvers (2017)
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