Behavioural Decisions and Welfare
AbstractWe study decision problems where (a) preference parameters are defined to include psychological/moral considerations and (b) there is a feedback effect from chosen actions to preference parameters. In a standard decision problem the chosen action is required to be optimal when the feedback effect from actions to preference parameters is fully taken into account. In a behavioural decision problem the chosen action is optimal taking preference parameters as given although chosen actions and preference parameters are required to be mutually consistent. Our framework unifes seemingly disconnected papers in the literature. We characterize the conditions under which behavioural and standard decisions problems are indistinguishable : in smooth settings, the two decision problems are generically distinguishable. We show that in general, revealed preferences cannot be used for making welfare judgements and we characterize the conditions under which they can inform welfare analysis. We provide an existence result for the case of incomplete preferences. We suggest novel implications for policy and welfare analysis.
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Bibliographic InfoPaper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 834.
Length: 33 pages
Date of creation: 2008
Date of revision:
Decisions ; psychology ; indistinguishability ; revealed preferences ; welfare ; existence ; aspirations;
Other versions of this item:
- D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
- D62 - Microeconomics - - Welfare Economics - - - Externalities
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
- I30 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-01-19 (All new papers)
- NEP-CBE-2008-01-19 (Cognitive & Behavioural Economics)
- NEP-EVO-2008-01-19 (Evolutionary Economics)
- NEP-HAP-2008-01-19 (Economics of Happiness)
- NEP-MIC-2008-01-19 (Microeconomics)
- NEP-UPT-2008-01-19 (Utility Models & Prospect Theory)
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