PRECAUTIONARY S AVING A ND SOCIAL L EARNING ACROSS G ENERATIONS: A N E XPERIMENT*

We use experimental methods to study how individuals solve life cycle ‘precautionary savings’ tasks. Some results resemble previous experimental work on dynamic optimisation tasks. Within our experiment, however, opportunities exist for subjects to learn from one another. Subjects participated in three-member ‘families’. Second and third ‘generation’ subjects observe and/or communicate with their ‘antecedent’ first or second generation subject. We find that later generations perform significantly better than earlier generations. The results speak to questions concerning the precautionary model of consumption, the modelling of dynamic decision behaviour more generally, and the possible importance of social learning to individual decision-making. … that prudence may be given to the simple, knowledge and discretion to the youth … Hear, my son, your father’s instruction, and reject not your mother’s teaching … Proverbs 1:4-8 (Revised Standard Version) We report the results of an experiment on a familiar intertemporal choice problem – how to divide current assets between consumption and saving when future income is uncertain. We find that subjects’ choices differ from those recommended by an optimal policy. This is unsurprising since various descriptive failures of dynamic optimisation (whether in games or individual choice tasks) are common in experiments. However, we also examine ‘social learning’. 1 Subjects participate in ‘families’ of three, are allowed to observe the ‘antecedent’ subject in their family, and are also encouraged to teach the ‘descendent’ subject in their family. We find that third generation subjects employ better consumption policies than do first generation subjects. One motive for experimental work on consumption behaviour comes from dissatisfaction with current results based on survey data. Browning and Lusardi