What is the Consumption Puzzle?

The Consumption Puzzle refers to the observed discrepancy between the predictions of standard economic models and actual consumer behavior, particularly regarding consumption patterns over time. According to these models, consumers should smooth their consumption based on expected lifetime income, but empirical evidence shows that consumption does not always behave as predicted, especially during economic downturns. This phenomenon raises questions about the assumptions of rational behavior and perfect foresight in traditional economic theories, prompting scholars to explore alternative explanations, such as behavioral economics or changes in consumer confidence.