The Method of Moderation

The Method of Moderation

In a risky world, a pessimist assumes the worst will happen. Someone who ignores risk altogether is an optimist. Consumption decisions are mathematically simple for both the pessimist and the optimist because both behave as if they live in a riskless world. A realist (someone who wants to respond optimally to risk) faces a much more difficult problem, but (under standard conditions) will choose a level of spending somewhere between pessimist’s and the optimist’s. We use this fact to redefine the space in which the realist searches for optimal consumption rules. The resulting solution accurately represents the numerical consumption rule over the entire interval of feasible wealth values with remarkably few computations.

Authors

  • Christopher D. Carroll - Johns Hopkins University
  • Alan Lujan - Johns Hopkins University (Corresponding Author)
  • Karsten Chipeniuk - Reserve Bank of New Zealand
  • Kiichi Tokuoka - Japanese Ministry of Finance
  • Weifeng Wu - Fannie Mae

Citation

@software{carroll2025moderation,
  title={The Method of Moderation},
  author={Carroll, Christopher D. and
          Lujan, Alan and
          Chipeniuk, Karsten and
          Tokuoka, Kiichi and
          Wu, Weifeng},
  year={2025},
  url={https://github.com/econ-ark/method-of-moderation},
  license={CC-BY-SA-3.0}
}

Details

Authors

Abstract

In a risky world, a pessimist assumes the worst will happen. Someone who ignores risk altogether is an optimist. Consumption decisions are mathematically simple for both the pessimist and the optimist because both behave as if they live in a riskless world. A realist (someone who wants to respond optimally to risk) faces a much more difficult problem, but (under standard conditions) will choose a level of spending somewhere between pessimist's and the optimist's. We use this fact to redefine the space in which the realist searches for optimal consumption rules. The resulting solution accurately represents the numerical consumption rule over the entire interval of feasible wealth values with remarkably few computations.

Actions

Live Interactive Notebook

This material includes a Jupyter Notebook version. You can directly launch and interact with the Notebook within your browser using MyBinder via the "Launch" button(s) below.

Binder badge logo

Material Source Code

Econ-ARK materials are open source and available to view and clone from GitHub.

View on GitHub

How to Execute this Notebook (with conda)

Install miniconda on your computer

  1. Open a Terminal (MacOS) or the Anaconda Prompt (Windows)
  2. At a command line, change the working directory to the one where you want to install
    • On MacOS/unix, if you install in the /tmp directory, the repo will disappear at reboot:
    • cd /tmp
  3. git clone https://github.com/econ-ark/method-of-moderation --recursive
  4. cd method-of-moderation
  5. conda env create -f ./binder/environment.yml --prefix ./condaenv
    • This creates ./condaenv inside your clone of the repo, containing dependencies.
  6. conda run --prefix ./condaenv pip install jupyterlab
  7. conda run --prefix ./condaenv jupyter-lab

Metadata

Edit metadata

Key Value
abstract In a risky world, a pessimist assumes the worst will happen. Someone who ignores risk altogether is an optimist. Consumption decisions are mathematically simple for both the pessimist and the optimist because both behave as if they live in a riskless world. A realist (someone who wants to respond optimally to risk) faces a much more difficult problem, but (under standard conditions) will choose a level of spending somewhere between pessimist's and the optimist's. We use this fact to redefine the space in which the realist searches for optimal consumption rules. The resulting solution accurately represents the numerical consumption rule over the entire interval of feasible wealth values with remarkably few computations.
authors {"family-names"=>"Carroll", "given-names"=>"Christopher D.", "orcid"=>"https://orcid.org/0000-0003-3732-9312"}
{"family-names"=>"Lujan", "given-names"=>"Alan", "orcid"=>"https://orcid.org/0000-0002-5289-7054"}
{"family-names"=>"Chipeniuk", "given-names"=>"Karsten"}
{"family-names"=>"Tokuoka", "given-names"=>"Kiichi"}
{"family-names"=>"Wu", "given-names"=>"Weifeng"}
cff-version 1.2.0
date-released
github_repo_url https://github.com/econ-ark/method-of-moderation
identifiers {"type"=>"url", "value"=>"https://econ-ark.github.io/method-of-moderation/"}
keywords consumption
saving
dynamic stochastic optimization
endogenous grid method
computational economics
Econ-ARK
message If you use this software, please cite it as below.
notebooks code/notebook.ipynb
remark-name MethodOfModeration
remark-version 1.0
tags REMARK
Reproduction
Teaching
Notebook
date