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Behavioral Decisions and Welfare (Replaced by CentER DP 2010-143)

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Author Info

  • Dalton, P.S.
  • Ghosal, S.

    (Tilburg University, Center for Economic Research)

Abstract

What are the normative implications of behavioral economics? We study a model where the decisions a person makes, consciously or unconsciously, affect her psycholog- ical state (reference point, beliefs, expectations, self-image) which, in turn, impacts on her ranking over available decisions in the first place. We distinguish between stan- dard decisions where the decision-maker internalizes the feedback from her actions to her psychological state, and behavioral decisions where the psychological state is taken as given (although a decision outcome requires that action and psychological state are mutually consistent). In a behavioral decision, the individual imposes an externality on herself. We provide an axiomatic characterization of behavioral decisions. We show that the testable implications of behavioral and standard decisions are di¤erent and the outcomes of the two decision problems are, typically, distinguishable. We discuss the consequences for public policy of our formal analysis and o¤er normative grounds for subsidized psychological therapies.

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Bibliographic Info

Paper provided by Tilburg University, Center for Economic Research in its series Discussion Paper with number 2010-22.

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Date of creation: 2010
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Handle: RePEc:dgr:kubcen:201022

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Web page: http://center.uvt.nl

Related research

Keywords: Behavioral Decisions; Welfare; Revealed Preferences; Normative Preferences;

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Cited by:
  1. Peter Kooreman & Henriëtte Prast, 2010. "What Does Behavioral Economics Mean for Policy? Challenges to Savings and Health Policies in the Netherlands," De Economist, Springer, vol. 158(2), pages 101-122, June.

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