Quick-Fixing: Near-Rationality in Consumption and Savings Behavior
When changing consumption-savings plans is costly, people may instead rely on quick-fixes: simple rules that avoid these costs. We field a novel survey to measure households’ consumption responses to small and large income shocks. Almost 70% of households follow one of four quick-fixes and fully consume or fully save small shocks, abruptly adjust their behavior for large shocks, and thereafter behave similarly. In an incomplete-markets model, quick-fixing is near-rational: the average opportunity cost of quick-fixing is only $17 per quarter. Yet, this small and empirically realistic deviation from benchmark models significantly alters aggregate consumption responses to income shocks.
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