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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-Perpi–an

    (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.

Suggested Citation

  • Jose-Luis Pinto-Prades & Jose-Maria Abellan-Perpi–an, 2011. "When normative and descriptive diverge: how to bridge the difference," Working Papers 11.06, Universidad Pablo de Olavide, Department of Economics.
    • Handle: RePEc:pab:wpaper:11.06
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    More about this item

    Keywords

    Social debiasing; true preferences; prospect theory; discovered preferences hypothesis; libertarian paternalism.;
    All these keywords.

    JEL classification:

    • I10 - Health, Education, and Welfare - - Health - - - General
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles

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