Cognitive dissonance causes people to
rationalize their actions under certain circumstances. When individuals'
actual consumption is a random variable distributed around their optimal
consumption they might rationalize their utility function so that their
optimal consumption equals their actual consumption. This essay investigates
the consequences of a flexible utility function that alters via rationalization
with the added feature of conformity. The main results are:
1) Optimal consumption will be unstable
and scatter in time. 2) Consumption bounded from underneath will tend to
grow. 3) When individuals are conformists, consumption bounded from underneath
will grow in a business cycle path. |
