The rationality of adaptive decision-making and the feasibility of optimal growth planning

Abstract

AbstractRationality, the premise of economics, is an ideal behavioral norm. In the real world, however, intertemporal decision-making is based on adaptive behavioral principles from companies to individual households. It bases on managerial accounting procedures, whereby action plans are formulated and implemented, differences from actual results are recognized, and revisions accumulate over time. We take the intertemporal decision-making problem of households’ consumption/saving (investment) planning in this paper. And we compare the validity of rationality and adaptability as decision-making principles. First, rational decision-making in the optimal growth model leads to a unique path. However, optimal growth planning is practically unstable on the saddle-point path and can only realize if it assumes rationality leading to perfect foresight. On the other hand, the growth paths guided by budget-controlled adaptive decision-making are diverse and distributed in the myriad around the optimal growth path. This redundancy creates stability in the management and operation of the plan. Because through the trial-and-error process of planning and actual comparison, we can implement a more advantageous plan while allowing for multiple next-best goals, including the optimal growth path. Moreover, the numerical results show that the sequentially adaptive consumption/investment planning is comparable to the optimal growth plan on a social welfare basis calculated by accumulating consumption utility and is practically manageable. For example, paths that exceed 0.9 as a ratio to the optimal growth plan are reachable from the initial planning stage at a ratio of 0.58. Based on the above results, we can now analyze intertemporal economic problems with this realistic, practical, and simple method, replacing dynamic optimization ones.