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When normative and descriptive diverge: how to bridge the difference

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  • Jose-Luis Pinto-Prades

    (Department of Economics, Universidad Pablo de Olavide)

  • Jose-Maria Abellan-Perpiñan

    ()
    (Department of Applied Economics, Universidad de Murcia)

Abstract

Revealed preferences are not consistent. Many anomalies have been found in different contexts. This finding leads to a divergence between normative and descriptive analyses. There are several ways of facing this problem. In this paper we argue in favour of debiasing observed choices in such a way that the “true” preferences are discovered. Our procedure is based on quantitative corrections derived from assuming the descriptive validity of prospect theory and the normative validity of Expected Utility. Those corrective formulas were first applied by Bleichrodt et al. (2001). We explain here how such formulas can be used to avoid inefficient allocation of health care resources. This approach shares the philosophy of Libertarian Paternalism (LP). However, it reduces some of the potential problems of LP: the definition of error (and the need to nudge people) is more clear and objective. In this sense, it reduces the chances that the regulator tries to nudge people toward behaviour based on her preferences and not on subject’s own preferences.

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File URL: http://www.upo.es/serv/bib/wps/econ1106.pdf
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Bibliographic Info

Paper provided by Universidad Pablo de Olavide, Department of Economics in its series Working Papers with number 11.06.

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Length: 32 pages
Date of creation: Jun 2011
Date of revision:
Handle: RePEc:pab:wpaper:11.06

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Keywords: Social debiasing; true preferences; prospect theory; discovered preferences hypothesis; libertarian paternalism.;

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  1. Abellan-Perpiñan, Jose Maria & Bleichrodt, Han & Pinto-Prades, Jose Luis, 2009. "The predictive validity of prospect theory versus expected utility in health utility measurement," Journal of Health Economics, Elsevier, Elsevier, vol. 28(6), pages 1039-1047, December.
  2. Diecidue, Enrico & Wakker, Peter P, 2001. " On the Intuition of Rank-Dependent Utility," Journal of Risk and Uncertainty, Springer, Springer, vol. 23(3), pages 281-98, November.
  3. Jonathan Shalev, 1997. "Loss Aversion Equilibrium," Game Theory and Information, EconWPA 9703001, EconWPA, revised 11 Mar 1997.
  4. Robert Sugden, 2005. "Coping with Preference Anomalies in Cost–Benefit Analysis: A Market-Simulation Approach," Environmental & Resource Economics, European Association of Environmental and Resource Economists, European Association of Environmental and Resource Economists, vol. 32(1), pages 129-160, 09.
  5. B. Douglas Bernheim & Antonio Rangel, 2005. "Behavioral Public Economics: Welfare and Policy Analysis with Non-Standard Decision-Makers," Discussion Papers, Stanford Institute for Economic Policy Research 04-033, Stanford Institute for Economic Policy Research.
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  7. Adam Booij & Bernard Praag & Gijs Kuilen, 2010. "A parametric analysis of prospect theory’s functionals for the general population," Theory and Decision, Springer, Springer, vol. 68(1), pages 115-148, February.
  8. Graham Loomes & Chris Starmer & Robert Sugden, 2003. "Do Anomalies Disappear in Repeated Markets?," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 113(486), pages C153-C166, March.
  9. Braga, Jacinto & Humphrey, Steven J. & Starmer, Chris, 2009. "Market experience eliminates some anomalies--and creates new ones," European Economic Review, Elsevier, Elsevier, vol. 53(4), pages 401-416, May.
  10. John Beshears & James Choi & David Laibson & Brigitte Madrian, 2007. "How Are Preferences Revealed?," Levine's Bibliography 122247000000001760, UCLA Department of Economics.
  11. Cox, James C. & Grether, David M., 1993. "The Preference Reversal Phenomenon: Response Mode, Markets and Incentives," Working Papers, California Institute of Technology, Division of the Humanities and Social Sciences 810, California Institute of Technology, Division of the Humanities and Social Sciences.
  12. Bleichrodt, Han & Quiggin, John, 1997. "Characterizing QALYs under a General Rank Dependent Utility Model," Journal of Risk and Uncertainty, Springer, Springer, vol. 15(2), pages 151-65, November.
  13. Cass R. Sunstein & Richard H. Thaler, 2003. "Libertarian paternalism is not an oxymoron," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, Federal Reserve Bank of Boston, vol. 48(Jun).
  14. Han Bleichrodt & José María Abellán-Perpiñan & JoséLuis Pinto & Ildefonso Méndez-Martínez, 2005. "Resolving inconsistencies in utility measurement under risk: Tests of generalizations of expected utility," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 798, Department of Economics and Business, Universitat Pompeu Fabra.
  15. Shogren, Jason F. & Cho, Sungwon & Koo, Cannon & List, John & Park, Changwon & Polo, Pablo & Wilhelmi, Robert, 2001. "Auction mechanisms and the measurement of WTP and WTA," Resource and Energy Economics, Elsevier, Elsevier, vol. 23(2), pages 97-109, April.
  16. Drazen Prelec, 1998. "The Probability Weighting Function," Econometrica, Econometric Society, Econometric Society, vol. 66(3), pages 497-528, May.
  17. Robert Sugden, 2009. "On Nudging: A Review of Nudge: Improving Decisions About Health, Wealth and Happiness by Richard H. Thaler and Cass R. Sunstein," International Journal of the Economics of Business, Taylor & Francis Journals, Taylor & Francis Journals, vol. 16(3), pages 365-373.
  18. Han Bleichrodt & Jose Luis Pinto, 2000. "A Parameter-Free Elicitation of the Probability Weighting Function in Medical Decision Analysis," Management Science, INFORMS, INFORMS, vol. 46(11), pages 1485-1496, November.
  19. Tversky, Amos & Kahneman, Daniel, 1992. " Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, Springer, vol. 5(4), pages 297-323, October.
  20. John C. Hershey & Paul J. H. Schoemaker, 1985. "Probability Versus Certainty Equivalence Methods in Utility Measurement: Are they Equivalent?," Management Science, INFORMS, INFORMS, vol. 31(10), pages 1213-1231, October.
  21. Peter Wakker & Veronika Köbberling & Christiane Schwieren, 2007. "Prospect-theory’s Diminishing Sensitivity Versus Economics’ Intrinsic Utility of Money: How the Introduction of the Euro can be Used to Disentangle the Two Empirically," Theory and Decision, Springer, Springer, vol. 63(3), pages 205-231, November.
  22. Jacinto Braga & Chris Starmer, 2005. "Preference Anomalies, Preference Elicitation and the Discovered Preference Hypothesis," Environmental & Resource Economics, European Association of Environmental and Resource Economists, European Association of Environmental and Resource Economists, vol. 32(1), pages 55-89, 09.
  23. Kobberling, Veronika & Wakker, Peter P., 2005. "An index of loss aversion," Journal of Economic Theory, Elsevier, Elsevier, vol. 122(1), pages 119-131, May.
  24. Gail Mitchell Hoyt, 2009. "Review of "Nudge: Improving Decisions About Health, Wealth, and Happiness"," International Review of Economic Education, Economics Network, University of Bristol, Economics Network, University of Bristol, vol. 8(1), pages 158-159.
  25. Brazier, John & Roberts, Jennifer & Deverill, Mark, 2002. "The estimation of a preference-based measure of health from the SF-36," Journal of Health Economics, Elsevier, Elsevier, vol. 21(2), pages 271-292, March.
  26. John C. Harsanyi, 1955. "Cardinal Welfare, Individualistic Ethics, and Interpersonal Comparisons of Utility," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 63, pages 309.
  27. Han Bleichrodt & Jose Luis Pinto & Peter P. Wakker, 2001. "Making Descriptive Use of Prospect Theory to Improve the Prescriptive Use of Expected Utility," Management Science, INFORMS, INFORMS, vol. 47(11), pages 1498-1514, November.
  28. Gijs Kuilen, 2009. "Subjective Probability Weighting and the Discovered Preference Hypothesis," Theory and Decision, Springer, Springer, vol. 67(1), pages 1-22, July.
  29. Jack Knetsch & Fang-Fang Tang & Richard Thaler, 2001. "The Endowment Effect and Repeated Market Trials: Is the Vickrey Auction Demand Revealing?," Experimental Economics, Springer, Springer, vol. 4(3), pages 257-269, December.
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