An evolutive model of a boundedly rational consumer with changing preferences and reference group consumption

Abstract

AbstractIn this paper, two dynamic models, recently proposed to describe the adaptive repeated choices of a boundedly rational consumer, are joined together. One considers a consumer adjusting the consumption level of a given good over time according to the observed discrepancy between expected and realized utility gain and modifies the utility function according to past consumption experience, also including saturation effects when past consumption is excessive. The other one considers the same adjustment mechanism with constant preferences but with a behavioral effect that introduces a tendency (or bias) to imitate a reference group of consumers. Merging these two models, a two-dimensional nonlinear dynamical system is obtained which describes consumers that decide their next period consumption of a given good by following two different (sometimes contrasting) criteria: their own utility maximization on the one side and imitation of a reference group of consumers on the other side. This leads to a greater uncertainty with respect to the model without the behavioral bias. Such uncertainty is studied through a numerical exploration of the long-run dynamics, guided by some global dynamical features of the nonlinear model, such as the folding action of the critical curves that characterize the behavior of the iterated noninvertible map and the singularities related to the presence of a vanishing denominator, namely focal points and prefocal curves. So, the aim of the paper is twofold: on the one side, it tries to contribute to the literature on the economic theory of boundedly rational consumers represented by evolutionary and behavioral approaches; On the other side, it tries to contribute to the recent literature about the global analysis of discrete dynamical systems characterized by contact bifurcations leading to the creation of complex topological structures of the attractors and their basins of attraction.