Choice simplification: a theory of mental budgeting and naive diversification

0524559 - NHÚ 2021 RIV US eng J - Journal Article
Kőszegi, B. - Matějka, Filip
Choice simplification: a theory of mental budgeting and naive diversification.
Quarterly Journal of Economics. Roč. 135, č. 2 (2020), s. 1153-1207. ISSN 0033-5533. E-ISSN 1531-4650
EU Projects: European Commission(XE) 678081 - INATTENTION
Institutional support: RVO:67985998
Keywords : microeconomic behavior * consumer economics * household saving
OECD category: Economic Theory
Impact factor: 15.563, year: 2020
Method of publishing: Open access
https://doi.org/10.1093/qje/qjz043

We develop a theory of how an agent makes basic multiproduct consumption decisions in the presence of taste, consumption opportunity, and price shocks that are costly to attend to. We establish that the agent often simplifies her choices by restricting attention to a few important considerations, which depend on the decision at hand and affect her consumption patterns in specific ways. If the agent’s problem is to choose the consumption levels of many goods with different degrees of substitutability, then she may create mental budgets for more substitutable products (e.g., entertainment). In some situations, it is optimal to specify budgets in terms of consumption quantities, but when most products have an abundance of substitutes, specifying budgets in terms of nominal spending tends to be optimal. If the goods are complements, in contrast, then the agent may—consistent with naive diversification—choose a fixed, unconsidered mix of products. And if the agent’s problem is to choose one of multiple products to fulfill a given consumption need (e.g., for gasoline or a bed), then it is often optimal for her to allocate a fixed sum for the need.
Permanent Link: http://hdl.handle.net/11104/0308906