24 November 2021
In a canonical intertemporal consumption problem, I show how anticipation of future consumption mistakes leads to higher current marginal propensities to consume (MPCs). This result is driven by mistakes in future consumption's response to saving changes (i.e., changes in asset balances) and is independent of their specific behavioral foundations. My framework can accommodate many widely studied behavioral biases, such as inattention, present bias, diagnostic expectations, and near-rationality (epsilon-mistakes). This channel helps explain the empirical puzzle on high-liquidity consumers' high MPCs and can be significant. The same channel can also help explain other puzzles in intertemporal choices, such as violations of the fungibility principle, excess discounting of future income, and large risk aversion. Methodologically, I develop a general approach to study predictions of sophistication (i.e., the anticipation of future mistakes) independent of the underlying behavioral biases.