Rules of thumb in macroeconomic equilibrium A quantitative analysis

We investigate the robustness of the general equilibrium stochastic growth model to the introduction of small costs of behavioral sophistication. Consumers choose amongst savings rules which vary in sophistication and effort cost. In our model, a given consumer's gain from using a sophisticated rule is higher when other consumers use simple rules. Thus, decentralization makes it harder for simple rules to survive than in similar decision-theoretic models. Nevertheless, we find: (i) that sophisticated behavior, which we model as fully unrestricted, occurs in equilibrium only if its relative effort cost is extremely low; and (ii) that rule-of-thumb economies can generate aggregate time series that differ substantially from those of the standard model.