Evaluating the rule of thumb behavior of US consumers through common factor portfolios

Purpose This paper investigates whether US economic agents exhibit Rule of Thumb behavior, using their current income as a primary determinant of consumption. Design/methodology/approach To test this, the Consumption Capital Asset Pricing Model (CCAPM) and the Generalized Method of Moments (GMM) are applied to estimate portfolios of common factors, based on monthly data from the US economy spanning 2005/2017. Findings The findings confirm the presence of Rule of Thumb behavior, showing that economic agents tend to be impatient and exhibit low risk aversion. However, an exception arises with the external habit model for non-durable goods consumption, where agents demonstrate high-risk aversion. Originality/value These results have important implications: they question the Permanent Income Hypothesis by highlighting liquidity constraints and behavioral consumption patterns. Evidence of Rule of Thumb behavior suggests that policies targeting current income can significantly influence aggregate consumption. Additionally, using common factor portfolios enhances understanding of consumer and investor behavior, offering relevant insights for policymakers, analysts, and portfolio managers within the US economic context.