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Joamal ojEconomic Paspectines-
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Winter 1990
Pagu 193-2D5
Anomalies Saving, Fungibility, and Mental Accounts
Richard H Thaler
Economics can be distinguished from other social sciences by the belief that most (all?) behavior can be explained by assuming that agents have stable, well-defined preferences and make rational choices consistent with those preferences in markets that (eventually) clear. An empirical result qualifies as an anomaly if it is difficult to "rationalize," or if implausible assumptions are necessary to explain it within the paradigm. This column will present a series of such anomalies. Readers are invited to suggest topics for future columns by sending a note with some references to (or better yet copies of) the relevant research.
welcome. The address is: Richard Thaler, c/o Journal of Economic Perspectives, Johnson Graduate School of Management, Malott Hall, Gornell University, Ithaca, NY 14853. Introduction
Last New Year's day, after a long evening of rooting the right team to victory in the Orange Bowl, I was lucky enough to win $300 in a college football betting pool. I then turned to the important matter of splurging the proceeds wisely. Would a case of champagne be better than dinner and a play in New York? At this point my son Greg came in and congratulated me. He said, "Gee Dad, you should be pretty happy. With that win you can increase your lifetime consumption by $20 a year!" Greg, it seems, had studied the life-cycle theory of savings.
The essence of the life-cycle theory is this: in any year, compute the present value of your wealth, including current income, net assets, and future income; figure out the Richmd H. Thaln is Hm>ictta Johnson Louis Professor of Economic, Johnson School of Mmeogement, Cmnell Unioersity, Ithaar, Nem York.
level annuity you could purchase with that money; then consume the amount you would receive if you in fact owned such an annuity. The theory is simple, elegant, and rational-qualities valued by economists. Unfortunately, as Courant, Gramlich, and Laitner observe (1986, p. 279-80), "for all its elegance and rationality, the life-cycle model has not tested out very well."
The anomalous empirical evidence on rnnsumption falls into roughly two categories. First, consumption appears to be excessively sensitive to income. Over the life-cycle, the young and...