By John G. Cross
This ebook develops dynamic fiscal versions utilizing the point of view and analytic framework supplied by means of mental studying concept. This framework is used to unravel obvious contradictions among optimization thought, which lies on the middle of all smooth financial idea, and day by day facts that short-run financial behaviour can't kind of be defined completely because the final result of successfully applied self-interest. the writer applies this perspective to a few troublesome areas during which literal functions of maximization concept haven't often proved to be passable. those comprise analyses of decision-making lower than uncertainty and playing behaviour, the function of consumer-oriented ads in influencing behaviour, the patience of rate dispersions in markets, and inflation.
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Additional resources for A Theory of Adaptive Economic Behavior
Figure 3 . 1 describes the results from this simulation, showing expected consumption levels as functions of income as well as of the time lag fol lowing a once-and-for-all change in income. The consumption behavior described in the figure matches closely the short-run/long-run pattern that is usually described in traditional theory: The very short-run con sumption function ( t = 5 ) displays very little responsiveness to income changes, whereas the longer-run functions ( t = 1 5 , t = 50, t = 100) approach more and more closely to the "equilibrium" relationship of C = 0.
Our procedure will be to put these proxies for the future into the utility function rather than the unspecified consumption they make pos sible. Besides corresponding much more closely to psychological patterns of behavior, this approach enjoys the intuitive appeal of the statement 28 A theory of adaptive economic behavior that people " like" to hold wealth even when it is unclear to them and to us what that wealth will be used for. It also avoids some of the worst of the expectations problems by removing the requirement that consumers be able to predict their own future tastes.
Success" may not refer to just any positive payoff, but only to those payoffs that exceed some subjective standard. The corporation whose profits have declined may respond as though it has experienced failure even though profits are positive. An annual income of $50,000 may mean success to the taxi driver but failure to the neurosurgeon. The tendency to establish payoff targets that then become criteria for performance evaluation is widely recognized and is reflected in the variety of theories of "satisficing" behavior and "aspira tion levels" that are found in both psychology and economics.