The paper Choice Simplification: A Theory of Mental Budgeting and Naive Diversification co-authored by Professor Botond Kőszegi has been published in the February issue of the Quarterly Journal of Economics.
Quarterly Journal of Economics is the top-ranked journal in economics with an impact factor of 11.775. It is one of 33 World Elite 4* journals in the CABS Academic Journal Guide, and one of 50 journals used in the Financial Times Research Rank.
Abstract
We develop a theory of how an agent makes basic multiproduct consumption decisions in the presence of taste, consumption opportunity, and price shocks that are costly to attend to. We establish that the agent often simplifies her choices by restricting attention to a few important considerations, which depend on the decision at hand and affect her consumption patterns in specific ways. If the agent’s problem is to choose the consumption levels of many goods with different degrees of substitutability, then she may create mental budgets for more substitutable products (e.g., entertainment). In some situations, it is optimal to specify budgets in terms of consumption quantities, but when most products have an abundance of substitutes, specifying budgets in terms of nominal spending tends to be optimal. If the goods are complements, in contrast, then the agent may—consistent with naive diversification—choose a fixed, unconsidered mix of products. And if the agent’s problem is to choose one of multiple products to fulfill a given consumption need (e.g., for gasoline or a bed), then it is often optimal for her to allocate a fixed sum for the need.