Myopia and Inconsistency in Dynamic Utility Maximization

Abstract

This paper presents a problem which I believe has not heretofore been analysed² and provides a theory to explain, under different circumstances, three related phenomena: (1) spendthriftiness; (2) the deliberate regimenting of one’s future economic behaviour— even at a cost; and (3) thrift. The senses in which we deal with these topics can probably not be very well understood, however, until after the paper has been read; but a few sentences at this point may shed some light on what we are up to.

“but you must bind me hard and fast, so that I cannot stir from the spot where you will stand me … and if 1 beg you to release me, you must tighten and add to my bonds.”—The Odyssey.

I am indebted to many colleagues at Northwestern University and elsewhere who have commented helpfully on this manuscript, and I am especially indebted to Mr. Fred Westfield and Dr. Alvin Marty for many sustained and fruitful discussions of the subject as well as to M. Jacques Drtze, Prof. Harry Johnson, Prof. R. Solow, Mr. S. A. Thore, Professor Gerhard Tintner, Professor H. Wold, and members of the seminar of the Department of Applied Economics, Cambridge University, for criticisms rendered. The usual caveat protecting these courteous people from further responsibility is, of course, in order.