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A NOTE ON UNCERTAINTY IN SAVINGS DECISIONS: CAN A NAÏVE STRATEGY BE OPTIMAL?

Published online by Cambridge University Press:  29 May 2013

Fábio Augusto Reis Gomes
Fábio Augusto Reis Gomes*
Affiliation:
Fucape Business School
*
Address correspondence to: Fábio Augusto Reis Gomes, Fucape Business School, Av. Fernando Ferrari, 1358, Boa Vista, Vitória-ES CEP 29075-505, Brazil; e-mail: fabiogomes@fucape.br.
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Abstract

This paper analyzes the process of decision-making on consumption in a two-period consumption setting, assuming the return on savings is uncertain in the sense of Knight [Risk, Uncertainty, and Profit. Boston: Houghton Mifflin (1921)]. The results imply that a naïve strategy to save zero is optimal for a continuum of income values. Under the Permanent Income Hypothesis, consumption equals current income only when current income is equal to permanent income. Indeed Campbell and Mankiw [in Olivier Blanchard and Stanley Fischer (eds.), NBER Macroeconomics Annual, pp. 185–214. Cambridge, MA: MIT Press (1989)] assumed that consumers who spend their total income are only following a simple rule of thumb. However, the naïve strategy obtained casts doubt on their interpretation.

Keywords

ConsumptionSavingsUncertaintyRule-of-Thumb Behavior
Type
Note
Information
Macroeconomic Dynamics , Volume 18 , Issue 6 , September 2014 , pp. 1428 - 1435
Copyright
Copyright © Cambridge University Press 2013 

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