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Seminar: "Can Restricted Optimal Irrational Behavior Reconcile High Saving with High Discount Rates?"
Emin Gahramanov of the School of Accounting, Economics and Finance, Faculty of Business and Law, at Deakin University in Australia will present the seminar.
Optimal irrational behavior offers an alternative to the standard rational paradigm of neoclassical economics that is more consistent with some observed behaviors and experimental evidence. However, it often predicts that households should save much more than we observe and also exhibits huge spikes in consumption at the end of life. Here we show that if households are restricted to learning a rule that consumption is proportional to income during the working life then optimal irrational behavior can yield plausible capital-output ratios with a hump-shaped consumption profile that also drops off after retirement, similar to empirical data.