Have you updated your plans lately?

Lennon said that “life is what happens to you when you’re busy making other plans”… And now we have a model for people who are too busy / too lazy / too dumb to plan–that is to say, everybody.

Inattentive ConsumersRICARDO A.M.R. REIS

http://papers.ssrn.com/paper.taf?abstract_id=774347

ABSTRACT:

This paper studies the consumption decisions of agents who face costs of acquiring, absorbing and processing information. These consumers rationally choose to only sporadically update their information and re-compute their optimal consumption plans. In between updating dates, they remain inattentive. This behavior implies that news disperses slowly throughout the population, so events have a gradual and delayed effect on aggregate consumption. The model predicts that aggregate consumption adjusts slowly to shocks, and is able to explain the excess sensitivity and excess smoothness puzzles. In addition, individual consumption is sensitive to ordinary and unexpected past news, but it is not sensitive to extraordinary or predictable events. The model further predicts that some people rationally choose to not plan, live hand-to-mouth, and save less, while other people sporadically update their plans. The longer are these plans, the more they save. Evidence using US aggregate and microeconomic data generally supports these predictions.

JEL Classification: D1, D8, D9, E2

Learning by writing

This is Robert Frank on having his students look for interesting questions and stories and then write about them, like:

“Why do brides often spend thousands of dollars on wedding dresses they will never wear again, while grooms often rent cheap tuxedos, even though they will attend many formal social events in the future?”

(…) there is no better way to master an idea than to write about it. Although the human brain is remarkably flexible, learning theorists now recognize that it is far better able to absorb information in some forms than others. Thus, according to the psychologist Jerome Bruner, children “turn things into stories, and when they try to make sense of their life they use the storied version of their experience as the basis for further reflection.” He went on, “If they don’t catch something in a narrative structure, it doesn’t get remembered very well, and it doesn’t seem to be accessible for further kinds of mulling over.” Even well into adulthood, we find it easier to process information in narrative form than in more abstract forms like equations and graphs. Most effective of all are narratives that we construct ourselves.

The economic-naturalist writing assignment plays to this strength. Learning economics is like learning a language. Real progress in both cases comes only from speaking. The economic-naturalist papers induce students to search out interesting economic stories in the world around them. When they find one, their first impulse is to tell others about it. They are also quick to recount interesting economic stories they hear from classmates. And with each retelling, they become more fluent in the underlying ideas.

Many students struggle to come up with an interesting question for their first paper. But by the time the second paper comes due, the more common difficulty is choosing which of several interesting questions to pursue.

(…) Daniel Boorstin, the former librarian of Congress, used to rise at 5 each morning and write for two hours before going into the office. “I write to discover what I think,” he explained. “After all, the bars aren’t open that early.” Mr. Boorstin’s morning sessions were even more valuable than he realized. Writing not only clarifies what you already know; it is also an astonishingly effective way to learn something new.

I agree, a most good economics boils down to good story-telling–but you have to understand the underlying model, btw. Unfortunately, many economists focus more on the size of their toolbox than in the power of the stories they can tell with even the most basic tools.