Seminar 218, Psychology and Economics: Mistakes in Future Consumption, High MPCs Now (Online)

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Submitted by Brandon Eltiste on August 12, 2020
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Online
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Tuesday, October 6, 2020 - 13:00
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Chen Lian, UC Berkeley

ABSTRACT: This paper develops an approach to study predictions independent from the exact psychological cause of behavioral mistakes. In a canonical intertemporal consumption problem, I show how anticipation of future mistakes, by itself, explains key deviations from the permanent in- come hypothesis. The result provides a potential explanation of the empirical puzzle on high liquidity consumers’ high marginal propensities to consume (MPCs) and violations of the fungibility principle. I also illustrate how my framework can accommodate most widely-studied behavioral biases, such as inattention, mental accounting, rules of thumb, and hyperbolic discounting.