This paper investigates empirically why Japan’s household savings rate fell in the 1990s. We constructed an economic model consisting of two types of household: unconstrained life-cycle households and liquidity-constrained households. Unconstrained households generally save, but liquidity-constrained households consume all of their disposable income. We found that the proportion of liquidity-co...

Multiple attribute search is a central feature of economic life: we consider much more than price when purchasing a home, and more than wage when choosing a job. Nevertheless, while single attribute search problems have been studied extensively, little is known about optimal search in multiple attribute environments. I introduce a partial characterization of optimal sequential search in a probl...

There is well-established evidence that decision makers consistently fail to consider all available options. Instead, they restrict attention to only a subset of alternatives and then undertake a more detailed analysis of this reduced set. This systematic lack of consideration of available options can lead to a “more is less” effect, where excess of options can be welfare-reducing for a decisio...

When consumers are not fully cognizant of the value of a good, they use their experience to estimate its value. Their past experience is selective if it only contains transactions that were carried out but not potential transactions that were not implemented. Failing to account for this selectivity may result in biased estimates of the post-purchase value. This paper presents a bounded rational...

This paper studies welfare criteria under an environment in which a decision maker is endowed with a nontransitive preference relation. In such an environment, the classical utilitarian welfare criterion may not identify the welfare order, and the problem of maximizing the decision maker’s welfare becomes ambiguous. In order to find a criterion that applies to nontransitive preference relations...

The higher our aspirations, the higher the probability that we have to adjust them downwards when forming more realistic expectations later on. This paper shows that the costs induced by high aspirations are not trivial. We first develop a theoretical framework to identify the factors that determine the effect of aspirations on expected utility. Then we present evidence from a lab experiment on...

The classical Ellsberg experiment presents individuals with a choice problem in which the probability of winning a prize is unknown (ambiguous). In this paper we study how individuals make choices between gambles in which the ambiguity is in di↵erent dimensions: the winning probability, the amount of the prize and the payment date, and many combinations. While the decision-theoretic models acco...

People often consume non-durable goods in a way that seems inconsistent with preferences for smoothing consumption over time. We suggest that such patterns of consumption can be better explained if one takes into account the future utility flows generated by memorable consumption goods—goods, such as a honeymoon or a vacation, whose utility flow outlives their physical consumption. We consider ...

It is frequently assumed in several domains of economics that demand functions are invertible prices. At the primitive level preferences, however, corresponding characterization has remained elusive. We identify necessary and sufficient conditions on a utility-maximizing consumer’s preferences for her function to be continuous invertible: strict convexity, monotonicity, differentiability sense ...

I propose an intertemporal precautionary saving model in which the agent’s labor income is subject to (possibly correlated) shocks with different degrees of persistence and volatility. However, he only observes his total income, not individual components. I show that partial observability of individual components of income gives rise to additional precautionary saving due to estimation risk, th...