To Consume or to Save : Are We Maximizing or What?

This chapter traces theoretical developments on the consumption/saving function since Irving Fisher and John Maynard Keynes and reviews relevant contributions from the field of behavioral economics. We then propose a model of consumption where an atemporal utility function involving current consumption and wealth is maximized. This formulation follows 19th century economists like Senior and Jevons who saw decisions as anchored in immediately experienced emotions. We show that this proposed model has behavioral plausibility and empirical evidence to support it. It offers a conceptual alternative to the view that explains rule of thumb behavior as shaped by heuristics that simplify more complex maximization problems