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Monday, April 16, 2018 at 4:15pm
Uris Hall, 498
Filip Matejka - CERGE-EI
An Attention-Based Theory of Mental Accounting
Joint with Botond Koszegi
Abstract: We analyze how a decision maker with limited attention optimally attends to and responds to taste, price, and income shocks in simple consumption-savings models. We identify several ways in which the agent can be interpreted to engage in mental accounting, derive comparative statics on the strength of these patterns, and make additional predictions. When allocating consumption among goods with different degrees of substitutability in the face of taste or price shocks, the agent may create budgets for the more substitutable consumption categories. This tendency is stronger if the cost of attention is higher, and if there is more variety in available products. When managing her consumption from and transfers between an investment account and a checking account, the latter of which she has an incentive to balance, the agent's marginal propensity to consume (MPC) out of shocks to the checking account is often greater than her MPC out of shocks to the investment account. Furthermore, to reduce the attention she must pay to her budgeting, the agent prefers to reduce spending risk, making her more averse to risk in the checking account than the investment account. As a result, she may optimally switch to a cheaper substitute product (such as a lower-grade gasoline) when a random price increase occurs.