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A Model of Consumer Choice With Bounded Rationality and Reference Quantity

Gian Italo Bischi, Fabio Tramontana

Source Title: International Journal of Applied Behavioral Economics (IJABE) 11(1)

DOI: 10.4018/IJABE.312248

Article PDF Download Open access articles are freely available for download

Abstract

The authors consider the economic problem of consumers' demand under the assumption of bounded rationality. They move from the hypothesis that the consumer does not know the amount of the good maximizing the utility but he/she is able to understand, at each time period, if the current consumption is above or below than the optimal choice and decide consequently for the next period. Moreover, they also take into consideration the role of a reference amount of consumption that can influence the consumption choice of the consumer. They show that this assumption led to a failure in the convergence process towards the rational choice because the equilibrium of the model, even when locally stable, is located on an intermediate value between the rational choice and the reference quantity.

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