Study on Finite Horizon Life Cycle Model of Consumption by Scenario Aggregation

Multistage optimization problems are common occurrence in the economic literature. Scenario aggregation method is a widely used in solving dynamic programming problems. It is adopted as an alternative to describe the decision making process of an optimizing agent in economic models. Decisions made by scenario aggregation provide more accuracy and less risk in multistage stochastic optimization than traditional methods. Specifically, the scenario aggregation method is used to obtain a solution to a finite horizon life cycle model of consumption. The characteristics of the methodology and the comparison of its solution to the analytical solution of the model should be discussed in future research.