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Asian Review of Financial Research, Vol., No..
pp.241~270
pp.241~270
A Utility Model of Learning How to Consume
Philip H. Dybvig Washington University in Saint Louis, USA,
Bong-Gyu Jang Department of Industrial and Management Engineering, POSTECH, Korea
Hyeng Keun Koo Graduate Department of Financial Engineering, Ajou University, Korea,
This paper proposes a utility model in which agents require effort to learn how to consume effectively. In this model, there is an ideal utility function of consumption that requires skill to achieve. At each time, there is a range of consumption levels for which the agent can consume at the full potential described by this ideal utility function, and consuming outside this range generates less than the potential utility. There is an optimal policy for expending effort to move the boundaries of the range of consumption levels at which the agent is skilled at consuming. When the range is narrow, the presence of this learning induces a kind of risk aversion in the large, and makes the indirect utility function more concave than it would otherwise be. When the utility loss of consuming outside the comfortable zone is relatively small or the cost of learning is sufficiently large, the agent consumes near the optimal consumption level, spending little effort in learning. In the opposite case, however, the agent never consumes outside the comfortable zone and expends relatively large effort on learning.
Philip H. Dybvig
Bong-Gyu Jang
Hyeng Keun Koo
This paper proposes a utility model in which agents require effort to learn how to consume effectively. In this model, there is an ideal utility function of consumption that requires skill to achieve. At each time, there is a range of consumption levels for which the agent can consume at the full potential described by this ideal utility function, and consuming outside this range generates less than the potential utility. There is an optimal policy for expending effort to move the boundaries of the range of consumption levels at which the agent is skilled at consuming. When the range is narrow, the presence of this learning induces a kind of risk aversion in the large, and makes the indirect utility function more concave than it would otherwise be. When the utility loss of consuming outside the comfortable zone is relatively small or the cost of learning is sufficiently large, the agent consumes near the optimal consumption level, spending little effort in learning. In the opposite case, however, the agent never consumes outside the comfortable zone and expends relatively large effort on learning.