Dynamic decision making with feasibility goals: A procedural-rationality approach

This paper proposes a new framework of intertemporal choice: decision making by means of so-called feasibility goals. These refer to the feasibility of certain target levels of consumption associated with specific future benchmark scenarios. The feasibility goals framework takes into account bounded/procedural rationality without stepping outside the realm of an optimization framework. The paper has two aims. First, it provides a general characterization of the feasibility goals framework. Second, it provides a simple life cycle model with feasibility goals to illustrate the applicability of the concept. The life cycle model is promising for better understanding individual portfolio choice.

Research Highlights▶ New framework of bounded rationality in intertemporal choice under uncertainty. ▶ No requirement of complete contingent action plan thanks to feasibility goals. ▶ Provision of general characterization of feasibility goals framework. ▶ A life cycle model with feasibility goals leads to very smooth consumption paths. ▶ The life cycle model explains portfolio choice better than existing models.