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Rules of Thumb versus Dynamic Programming

Author

Listed:
  • Harald Uhlig
  • Martin Lettau

Abstract

This paper studies decisionmaking with rules of thumb in the context of dynamic decision problems and compares it to dynamic programming. A rule is a fixed mapping from a subset of states into actions. Rules are compared by averaging over past experiences. This can lead to favoring rules which are only applicable in good states. Correcting this good state bias requires solving the dynamic program. The authors provide a general framework and characterize the asymptotic properties. They apply it to provide a candidate explanation for the sensitivity of consumption to transitory income.

Suggested Citation

  • Harald Uhlig & Martin Lettau, 1999. "Rules of Thumb versus Dynamic Programming," American Economic Review, American Economic Association, vol. 89(1), pages 148-174, March.
    • Handle: RePEc:aea:aecrev:v:89:y:1999:i:1:p:148-174
    Note: DOI: 10.1257/aer.89.1.148
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    References listed on IDEAS

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    More about this item

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth

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