When normative and descriptive diverge: how to bridge the difference
AbstractRevealed 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.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Universidad Pablo de Olavide, Department of Economics in its series Working Papers with number 11.06.
Length: 32 pages
Date of creation: Jun 2011
Date of revision:
Social debiasing; true preferences; prospect theory; discovered preferences hypothesis; libertarian paternalism.;
Other versions of this item:
- Jose-Luis Pinto-Prades & Jose-Maria Abellan-Perpiñan, 2012. "When normative and descriptive diverge: how to bridge the difference," Social Choice and Welfare, Springer, vol. 38(4), pages 569-584, April.
- I10 - Health, Education, and Welfare - - Health - - - General
- D03 - Microeconomics - - General - - - Behavioral Microeconomics; Underlying Principles
This paper has been announced in the following NEP Reports:
- NEP-ALL-2011-06-25 (All new papers)
- NEP-EVO-2011-06-25 (Evolutionary Economics)
- NEP-UPT-2011-06-25 (Utility Models & Prospect Theory)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Han Bleichrodt & Jose María Abellán Perpiñán & Jose Luis Pinto-Prades & Ildefonso Méndez-Martínez, 2006.
"Resolving Inconsistencies in Utility Measurement under Risk: Tests of Generalizations of Expected Utility,"
06.19, Universidad Pablo de Olavide, Department of Economics.
- Han Bleichrodt & Jose Maria Abellan-Perpiñan & Jose Luis Pinto-Prades & Ildefonso Mendez-Martinez, 2007. "Resolving Inconsistencies in Utility Measurement Under Risk: Tests of Generalizations of Expected Utility," Management Science, INFORMS, vol. 53(3), pages 469-482, March.
- 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 798, Department of Economics and Business, Universitat Pompeu Fabra.
- SHALEV, Jonathan, .
"Loss aversion equilibrium,"
CORE Discussion Papers RP
-1456, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
- John C. Harsanyi, 1955. "Cardinal Welfare, Individualistic Ethics, and Interpersonal Comparisons of Utility," Journal of Political Economy, University of Chicago Press, vol. 63, pages 309.
- Jack Knetsch & Fang-Fang Tang & Richard Thaler, 2001. "The Endowment Effect and Repeated Market Trials: Is the Vickrey Auction Demand Revealing?," Experimental Economics, Springer, vol. 4(3), pages 257-269, December.
- Beshears, John Leonard & Choi, James J. & Laibson, David I. & Madrian, Brigitte, 2008.
"How Are Preferences Revealed?,"
11130523, Harvard University Department of Economics.
- John Beshears & James Choi & David Laibson & Brigitte Madrian, 2007. "How Are Preferences Revealed?," Levine's Bibliography 122247000000001760, UCLA Department of Economics.
- John Beshears & James Choi & David Laibson & Brigitte Madrian, 2008. "How are Preferences Revealed?," Yale School of Management Working Papers amz2466, Yale School of Management.
- John Beshears & James J. Choi & David Laibson & Brigitte C. Madrian, 2008. "How are Preferences Revealed?," NBER Working Papers 13976, National Bureau of Economic Research, Inc.
- 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, vol. 28(6), pages 1039-1047, December.
- Tversky, Amos & Kahneman, Daniel, 1992. " Advances in Prospect Theory: Cumulative Representation of Uncertainty," Journal of Risk and Uncertainty, Springer, vol. 5(4), pages 297-323, October.
- B. Douglas Bernheim & Antonio Rangel, 2005.
"Behavioral Public Economics: Welfare and Policy Analysis with Non-Standard Decision-Makers,"
NBER Working Papers
11518, National Bureau of Economic Research, Inc.
- B. Douglas Bernheim & Antonio Rangel, 2005. "Behavioral Public Economics: Welfare and Policy Analysis with Non-Standard Decision-Makers," Discussion Papers 04-033, Stanford Institute for Economic Policy Research.
- Sunstein, Cass R. & Thaler, Richard H., 2003.
"Libertarian Paternalism Is Not An Oxymoron,"
- Gail Mitchell Hoyt, 2009. "Review of "Nudge: Improving Decisions About Health, Wealth, and Happiness"," International Review of Economic Education, Economics Network, University of Bristol, vol. 8(1), pages 158-159.
- David M. Grether & James C. Cox, 1996.
"The preference reversal phenomenon: Response mode, markets and incentives (*),"
Springer, vol. 7(3), pages 381-405.
- Cox, James C. & Grether, David M., 1993. "The Preference Reversal Phenomenon: Response Mode, Markets and Incentives," Working Papers 810, California Institute of Technology, Division of the Humanities and Social Sciences.
- 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, vol. 16(3), pages 365-373.
- Loomes, Graham & Chris Starmer & Robert Sugden, 2002.
"Do Anomalies Disappear in Repeated Markets?,"
Royal Economic Society Annual Conference 2002
132, Royal Economic Society.
- Drazen Prelec, 1998. "The Probability Weighting Function," Econometrica, Econometric Society, vol. 66(3), pages 497-528, May.
- Peter Wakker & Veronika KÃ¶bberling & Christiane Schwieren, 2007. "Prospect-theoryâ€™s Diminishing Sensitivity Versus Economicsâ€™ Intrinsic Utility of Money: How the Introduction of the Euro can be Used to Disentangle the Two Empirically," Theory and Decision, Springer, vol. 63(3), pages 205-231, November.
- Booij, Adam S. & van Praag, Bernard M. S. & van de Kuilen, Gijs, 2009.
"A Parametric Analysis of Prospect Theory's Functionals for the General Population,"
IZA Discussion Papers
4117, Institute for the Study of Labor (IZA).
- Adam Booij & Bernard Praag & Gijs Kuilen, 2010. "A parametric analysis of prospect theory’s functionals for the general population," Theory and Decision, Springer, vol. 68(1), pages 115-148, February.
- Adam S. Booij & Bernard M.S. Van Praag & Gijs Van De Kuilen, 2009. "A Parametric Analysis of Prospect Theory's Functionals for the General Population," CESifo Working Paper Series 2609, CESifo Group Munich.
- Kobberling, Veronika & Wakker, Peter P., 2005. "An index of loss aversion," Journal of Economic Theory, Elsevier, vol. 122(1), pages 119-131, May.
- Bleichrodt, Han & Quiggin, John, 1997. "Characterizing QALYs under a General Rank Dependent Utility Model," Journal of Risk and Uncertainty, Springer, vol. 15(2), pages 151-65, November.
- Han Bleichrodt & Jose Luis Pinto, 2000. "A Parameter-Free Elicitation of the Probability Weighting Function in Medical Decision Analysis," Management Science, INFORMS, vol. 46(11), pages 1485-1496, November.
- 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, vol. 23(2), pages 97-109, April.
- Jacinto Braga & Chris Starmer, 2005. "Preference Anomalies, Preference Elicitation and the Discovered Preference Hypothesis," Environmental & Resource Economics, European Association of Environmental and Resource Economists, vol. 32(1), pages 55-89, 09.
- John C. Hershey & Paul J. H. Schoemaker, 1985. "Probability Versus Certainty Equivalence Methods in Utility Measurement: Are they Equivalent?," Management Science, INFORMS, vol. 31(10), pages 1213-1231, October.
- 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, vol. 21(2), pages 271-292, March.
- 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, vol. 32(1), pages 129-160, 09.
- Jacinto Braga & Steven Humphrey & Chris Starmer, 2006.
"Market Experience Eliminates Some Anomalies – And Creates New Ones,"
2006-19, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.
- Braga, Jacinto & Humphrey, Steven J. & Starmer, Chris, 2009. "Market experience eliminates some anomalies--and creates new ones," European Economic Review, Elsevier, vol. 53(4), pages 401-416, May.
- 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, vol. 47(11), pages 1498-1514, November.
- Diecidue, Enrico & Wakker, Peter P, 2001.
" On the Intuition of Rank-Dependent Utility,"
Journal of Risk and Uncertainty,
Springer, vol. 23(3), pages 281-98, November.
- Gijs Kuilen, 2009. "Subjective Probability Weighting and the Discovered Preference Hypothesis," Theory and Decision, Springer, vol. 67(1), pages 1-22, July.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Publicación Digital - UPO).
If references are entirely missing, you can add them using this form.