Behavioral Life-Cycle Hypotheses

https://www.researchgate.net/publication/5210679_The_Behavioral_Life-Cycle_Hypothesis

Therefore, in an effort to get beyond this sort of general critique, we suggest that the life-cycle model can be enriched by incorporating three important behavioral features that are usually missing in economic analyses. (1) Self-control: we recognize that self-control is costly, and that economic agents will use various devices such as pension plans and rules-of-thumb to deal with the difficulties of postponing a significant portion of their consumption until retirement. We also incorporate temptation into the analysis since some situations are less conductive to saving than others. (2) Mental accounting: most households act as if they used a system of mental accounts which violate the principle of fungibility. Specifically, some mental accounts, those which are considered "wealth", are less tempting than those which are considered "income". (3) Framing: an implication of the differential temptation of various mental accounts is that the saving rate can be affected by the way in which increments to wealth are "framed" or described. Our model predicts that income paid in the form of a lump sum bonus will be treated differently from regular income even if the bonus is completely anticipated. Building upon the research done on these topics by psychologists and other social scientists, we are able to make specific predictions about how actual household saving behavior will differ from the idealized LC model.
p.610

THE MODEL

Self-Control and Temptation: The Problem
In the Theory of Interest Irving Fisher bases his explanation of personal saving upon five characteristics: foresight, self-control, habits, expectation of life, and love for posterity. We concentrate here on the first three factors and the relationships among them. Foresight is important since retirement saving requires long-term planning. Self-control is necessary because immediate consumption is always an attractive alternative to retirement saving. Successfully dealing with self-control problems requires the cultivation of good habits. In presenting our model we begin with the concept of self-control.
p.610

How does self-control differ from ordinary choice? The distinguished psychologist William James I says that the key attribute of self-control choices is the "feeling of effort" that is present.

Effort of attention is thus the essential phenomenon of will. Every reader must know by his own experience that this is so, for every reader must have felt some fiery passion's grasp. What constitutes the difficulty for a man laboring under an unwise passion of acting as if the passion were wise? Certainly there is no physical difficulty. It is as easy physically to avoid a fight as to begin one, to pocket one's money as to squander it on one's cupidities, to walk away from as towards a coquette's door. The difficulty is mental: it is that of getting the idea of the wise action to stay before our mind at all.

Incorporating the effort that is present in self-control contexts involves three elements normally excluded from economic analyses: internal conflict, temptation, and willpower. The very term "self-control" implies that the trade-offs between immediate gratification and long-run benefits entail a conflict that is not present in a choice between a white shirt and a blue one. When modeling choice under such circumstances the concept of temptation must be incorporated because of the obvious fact that some situations are more tempting than others. A model of saving that omits temptation is misspecified. The term willpower represents the real psychic costs of resisting temptation. The behavioral life cycle hypothesis modifies the standard life cycle model to incorporate these features. To capture formally the notion of internal conflict between the rational and emotional aspects of an individual's personality, we employ a dual preference structure. Individuals are assumed to behave as if they have two sets of coexisting and mutually inconsistent preferences: one concerned with the long run, and the other with the short run. We refer to the former as the planner and the latter as the doer. To place the preceding concepts into a formal structure consider an individual whose lifetime extends over T periods, with the final period representing retirement. The lifetime income stream is given by y. For simplicity we assume a perfect capital market and zero real rate of interest. Let retirement income be zero.
p.611


p. 636-638

CONCLUSION

The LC model is clearly in the mainstream tradition of microeconomic theory. It is typical of the general approach in microeconomics, which is to use a normative-based maximizing model for descriptive purposes. The recent papers by Hall and Mishkin (1982) and Courant et al. (1986) are really advances in the LC tradition.
Our model is quite different in spirit. First of all, our agents have very human limitations, and they use simple rules of thumb that are, by nature, second-best. While the LC model is a special case of our model (when either a first-best rule exists or ther is no self-control problem), our model was developed specifically to describe actual behavior, not to characterize rational behavior. It differs from a standard approach in three important ways.
(1) It is consistent with behavior that cannot be reconciled with a single utility function.
(2) It permits "irrelevant" factors (i.e., those other than age and wealth) to affect consumption. Even the form of payment can matter.
(3) Actual choices can be strictly within the budget set (as a Christmas club).
The relationship between the self-control model and the LC model is similar to the relationship between Daniel Kahneman and Amos Tversky's (1979) prospect theory and expected utility theory. Expected utility theory [p.637] is a well- established standard for rational choice under uncertainty. Its failure to describe individual behavior has led to the development of other models (such as prospect theory) that appear to do a better job at the tasks of description and prediction. The superiority of prospect theory as a predictive model, of course, in no way weakens expected utility theory's value as a presciptive norm. Similarly, since we view the LC model as capturing the preferences of our planner, we do not wish to question its value to prescriptive economic theory. The LC model has also served an enormously useful role in providing the theory against which empirical evidence can be judged. For example, the one-to-one pension offset was a result derived from the LC model (without bequests), and the numerous studies we cite were no doubt stimulated by the opportunity to test this prediction. Saving adequacy even more directly requires a life-cycle criterion of appropriate saving with which actual saving can be compared.
At times we have argued that the use of ad hoc assumptions, added to the theory after the anomalous empirical evidence has been brought forward, renders the LC model untestable. It is reasonable to ask whether our model is testable. We think that it is. Every one of the propositions we examined in this paper represents a test our model might have failed. For example, if the estimated pension offsets were mostly close to -1.0 instead of mostly close to zero, we would have taken that as evidence that self-control problems are empirically unimportant. Similarly, the effects of bonuses on saving could have been negligible, implying that mental accounting has little to add.
Other tests are also possible. Our theory suggests the following additional propositions.
PREDICTION 8. Holding lifetime income constant, home ownership will increase retirement wealth.
PREDICTION 9. The marginal propensity to consume inheritance income will depend on the form in which the inheritance is received.
The more the inheritance resembles "income" rather than "wealth", the greater will be the MPC. Thus the MPC will be greater for cash than for stocks, and greater for stocks than for real estate.
PREDICTION 10. The marginal propensity to consume dividend income is greater than the marginal propensity to consume increases in the value of stock holdings.
We have not investigated the empirical validity of these propositions. We hope others who are skeptical of our theory will do so. Nevertheless, while we think that neither our theory nor the LC theory is empty, refutation is probably not the most useful way of thinking about the task at hand. It is easy to demonstrate that any theory in social science is wrong. (We do not believe that individuals literally have planners and doers, for example.) Negative results and counterexamples must be only a first step. This paper is [p.638] intended to be constructive rather than destructive, and to show that the consideration of self-control problems enables us to identify variables that are usually ignored in economic analyses but which have an important influence on behavior.


ABSTRACTS

Self-control, mental accounting, and framing are incorporated in a behavioral enrichment of the life-cycle theory of saving called the behavioral life-cycle hypothesis. The key assumption of the behavioral life-cycle theory is that households treat components of their wealth as nonfungible, even in the absence of credit rationing. Specifically, wealth is assumed to be divided into three mental accounts: current income, current assets, and future income. The temptation to spend is assumed to be greatest for current income and least for future income. Considerable empirical support for the behavioral life-cycle theory is presented, primarily drawn from published econometric studies. Copyright 1988 by Oxford University Press.

Utility Theory

Utility Theory

https://www.cs.ubc.ca/~kevinlb/teaching/cs532l%20-%202013-14/Lectures/Utility%20Theory.pdf
A utility function is a real-valued function that indicates how much agents like an outcome.
In the presence of uncertainty, rational agents act to maximize their expected utility.
Utility is a foundational concept in game theory.
But it is a nontrivial claim:
1 Why should we believe that an agent's preferences can be adequately represented by a single number?
2 Why should agents maximize expectations rather than some other criterion?
Von Neumann and Morgenstern's theorem shows why (and when!) these are true.
It is also a good example of some common elements in game theory (and economics):
Behaving \as-if"
Axiomatic characterization

https://en.wikipedia.org/wiki/Von_Neumann%E2%80%93Morgenstern_utility_theorem
https://en.wikipedia.org/wiki/Utility
http://static.luiss.it/hey/microeconomia/book/Ch21.pdf
https://www.journals.uchicago.edu/doi/abs/10.1086/257028?journalCode=jpe


https://www.researchgate.net/publication/24099287_Assessment_of_Attribute_Importances_and_Consumer_Utility_Functions_Von_Neumann-Morgenstern_Theory_Applied_to_Consumer_Behavior

CONCLUSION

This initial application of vN-M utility theory indicates that consumer measurement is feasible, psychological attributes can be included, and empirical results were equal to or better than two competing approaches. These are encouraging results because this implies vN-M utility theory's attractive features of modeling risk, indifference measurement, and identification of practical form have potential for application in consumer research.

Von Neumann-Morgenstern utility theory can be a valuable tool for understanding and predicting consumer behavior. It can be most effective if: (1) risk aversion and interaction phenomena are deemed to be important in the consumer's behavior, (2) a sufficient budget is available for the personal interviews, (3) individual utility parameters are important to the research or managerial question, and (4) consumers are well educated. It is particularly effective if the number of decision-makers is small and the choice decision large. For example, purchase of large computers, aircraft, automated machine tools, or other industrial products might be good applications. Other useful examples might be consumer durables, such as washer / dryers or automobiles. In services it might be applicable to health care, college selection, and career selection.

Several future areas of research are appropriate. Our application acknowledges measurement error, but does not explicitly include it in parameter estimation. Research is needed to allow degrees of freedom and to develop distributional assumptions for parameter estimation. The utility and conjoint axioms appear compatible, but research is needed to develop a common set of consistent axioms. Needed also are statistical tests of assumptions so that confidence limits can be set for the repeated lottery and tradeoff questions used in testing utility and preferential independence.

Another topic is the development of more efficient measurement techniques, thus allowing some combination of more complexity, more attributes, or more assumption testing. A final need is to develop simpler measurement methods. Our sample was MIT students. Von Neumann-Morgenstern utility theory requires further testing to determine whether an average respondent could accurately answer lottery questions, even with careful training.

Ecological Models of Human Development

http://impactofspecialneeds.weebly.com/uploads/3/4/1/9/3419723/ecologial_models_of_human_development.pdf
Urie Bronfenbrenner (1994)
International Encyclopedia of Education, Vol. 3, 2nd. Ed. Oxford: Elsevier.
NY: Freeman.

Urie Bronfenbrenner argues that in order to understand human development, one must consider the entire ecological system in which growth occurs. This system is composed of five socially organized subsystems that help support and guide human growth. They range from the microsystem, which refers to the relationship between a developing person and the immediate environment, such as school and family, to the macrosystem, which refers to institutional patterns of culture, such as the economy, customs, and bodies of knowledge.

1. A microsystem is a pattern of activities, social roles, and interpersonal relations experienced by the developing person in a given face-to-face setting with particular physical, social, and symbolic features that invite, permit, or inhibit engagement in sustained, progressively more complex interaction with, and activity in, the immediate environment. Examples include such settings as family, school, peer group, and workplace.

2. The mesosystem comprises the linkages and processes taking place between two or more settings containing the developing person (e.g., the relations between home and school, school and workplace, etc). In other words, a mesosystem is a system of microsystems.

3. The exosystem comprises the linkages and processes taking place between two or more settings, at least one of which does not contain the developing person, but in which events occur that indirectly influence processes within the immediate setting in which the developing person lives (e.g., for a child, the relation between the home and the parent's workplace; for a parent, the relation between the school and the neighborhood peer group).

4. The macrosystem consists of the overarching pattern of micro-, meso-, and exosystems characteristic of a given culture or subculture, with particular reference to the belief systems, bodies of knowledge, material resources, customs, life-styles, opportunity structures, hazards, and life course options that are embedded in each of these broader systems. The macrosystem may be thought of as a societal blueprint for a particular culture or subculture.

5. A chronosystem encompasses change or consistency over time not only in the characteristics of the person but also of the environment in which that person lives (e.g., changes over the life course in family structure, socioeconomic status, employment, place of residence, or the degree of hecticness and ability in everyday life).

Book quote: Sources for Islamic law accepted by various schools of thought

Many general principles appear in the reference books of jurisprudence but here we will only discuss thirty:
1. Possession indicates ownership
2. The principle of permissibility
3. The principle of validity
4. The principle of purity
5. Islamic law does not occasion harm
6. Islamic law does not occasion unbearable hardship
7. Certainty is not challenged by doubt
8. When a text is clear, interpretations are unacceptable
9. Liability for damage
10. Avoidance of disadvantage has priority over considerations of benefit
11. Rulings regarding conflicts in evidence
12. Table of priorities
13. Casting lots
14. Ends do not justify means
15. Contracts are based upon the intentions of participating parties
16. Not to cooperate in the perpetration of sinful actions
17. Those who have been deceived are entitled to redress
18. Actions undertaken with good intent do not incur liability
19. Nursling nurture establishes ties equivalent to blood relationships
20. Reliance on the muslim market
21. Invalid terms and conditions of contract
22. Custom circumscribes religious rulings
23. Summary knowledge is as binding as detailed knowledge
24. Persistent doubts are to be ignored
25. All liquids that cause intoxication are considered impure
26. Inability to fulfill a religious duty does not absolve one from obligation
27. Dissimulation and its manifestations
28. The execution of a will has precedence over distribution of assets
29. Speculative analogies do not provide valid bases
30. Changes of circumstance lead to changes in rulings

p. 14-15
Thirty Principles of Islamic Jurisprudence. Ayatollah Sayyid Fadhel Hosseini Milani. Recorded and edited by Amar Hegedus. Ansariyan Publications. Iran. First edition by Islam in Englis Press London. 2011.
http://ijtihadnet.com/wp-content/uploads/5795.pdf