In the light of repeated rejections of the Hall (1978) version of the life
cycle-permanent income hypothesis and other empirical puzzles, the habit
formation hypothesis has increased in popularity since the 1980s. However,
existing formulations of habit persistence do not always perform well empirically.
This paper pursues two objectives: (i) to outline the habit persistence hypothesis,
and (ii) to review the theory of addiction with a focus on issues of relevance to the
theory of consumption. In the literature on addiction, two research traditions are
discernible: rational addiction and myopic addiction. The former approach
emphasises forward-looking behaviour and defines memory loss as a univariate
process. The latter relies on multiple objectives and highlights the role of
contractual behaviour. The paper argues that future research in consumption with
habits ought to pay more attention to non-separabilities, allow for multivariate
processes when modelling memory loss and consider rational habit modification.