A Simulation of Budgetary Decision-Making

This paper reports on a study of the way that people make decisions about the allocation of income between categories of expenditure, such as food, rent and leisure. The most common (economic) approach to formalising budgetary decision processes is deductive: a theory is proposed and its implications are then explored. However, it is also possible to develop formal models inductively and this is the approach used here. Starting from interviews with a sample of eight full time postgraduate students, we constructed the simulation of budgetary decisionmaking which is presented in this paper. The budgetary practices described by subjects were formalised as a set of rules for each respondent. The budgetary behaviour produced by these rules was then explored for different potential incomes and expenditure levels. It was shown that the existence of even quite limited foresight in agents enabled them to balance their budgets despite the fact that potential out goings considerably exceeded income. The paper also discusses some implications of the inductive approach to model building and the contrast between economic theory and the interview data. It concludes by outlining some directions for future research.