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Behavioural Decisions and Welfare

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  • Dalton, Patricio

    (Department of Economics, University of Warwick)

  • Ghosal, Sayantan

    (Department of Economics, University of Warwick)

Abstract

We 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 Info

Paper provided by University of Warwick, Department of Economics in its series The Warwick Economics Research Paper Series (TWERPS) with number 834.

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Length: 33 pages
Date of creation: 2008
Date of revision:
Handle: RePEc:wrk:warwec:834

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Keywords: Decisions ; psychology ; indistinguishability ; revealed preferences ; welfare ; existence ; aspirations;

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References

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  1. Yusufcan Masatlioglu & Daisuke Nakajima & Erkut Y. Ozbay, 2012. "Revealed Attention," American Economic Review, American Economic Association, American Economic Association, vol. 102(5), pages 2183-2205, August.
  2. Loewenstein, George & Ubel, Peter A., 2008. "Hedonic adaptation and the role of decision and experience utility in public policy," Journal of Public Economics, Elsevier, Elsevier, vol. 92(8-9), pages 1795-1810, August.
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  5. Beshears, John & Choi, James J. & Laibson, David & Madrian, Brigitte C., 2008. "How are preferences revealed?," Journal of Public Economics, Elsevier, Elsevier, vol. 92(8-9), pages 1787-1794, August.
  6. 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).
  7. Dalton, Patricio S; Ghosal, Sayantan; Mani, Anandi, 2010. "Poverty and Aspirations Failure," CAGE Online Working Paper Series, Competitive Advantage in the Global Economy (CAGE) 22, Competitive Advantage in the Global Economy (CAGE).
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  9. Milgrom, Paul & Shannon, Chris, 1994. "Monotone Comparative Statics," Econometrica, Econometric Society, Econometric Society, vol. 62(1), pages 157-80, January.
  10. Dalton, Patricio; Ghosal, Sayantan;, 2010. "Decisions with Endogenous Frames," CAGE Online Working Paper Series, Competitive Advantage in the Global Economy (CAGE) 30, Competitive Advantage in the Global Economy (CAGE).
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  12. Matthew Rabin, 2006. "A Model of Reference-Dependent Preferences," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 121(4), pages 1133-1165, November.
  13. B. Douglas Bernheim, 2010. "Behavioral welfare economics," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 57(2), pages 123-151, June.
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  15. George Loewenstein & Ted O'Donoghue & Matthew Rabin, 2003. "Projection Bias In Predicting Future Utility," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 118(4), pages 1209-1248, November.
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  22. Botond Kőszegi, 2010. "Utility from anticipation and personal equilibrium," Economic Theory, Springer, Springer, vol. 44(3), pages 415-444, September.
  23. Mandler, Michael, 2005. "Incomplete preferences and rational intransitivity of choice," Games and Economic Behavior, Elsevier, Elsevier, vol. 50(2), pages 255-277, February.
  24. Richard H. Thaler & Cass R. Sunstein, 2003. "Libertarian Paternalism," American Economic Review, American Economic Association, American Economic Association, vol. 93(2), pages 175-179, May.
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Citations

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Cited by:
  1. Dalton, Patricio; Ghosal, Sayantan, 2010. "Behavioural Decisions and Policy," CAGE Online Working Paper Series, Competitive Advantage in the Global Economy (CAGE) 37, Competitive Advantage in the Global Economy (CAGE).
  2. Dalton, P.S. & Ghosal, S. & Mani, A., 2011. "Poverty and Aspirations Failure," Discussion Paper, Tilburg University, Center for Economic Research 2011-124, Tilburg University, Center for Economic Research.
  3. B. Douglas Bernheim, 2010. "Behavioral welfare economics," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 57(1), pages 1-22, March.
  4. Dalton, Patricio S. & Ghosal, Sayantan, 2013. "Characterizing Behavioral Decisions with Choice Datas," SIRE Discussion Papers, Scottish Institute for Research in Economics (SIRE) 2013-86, Scottish Institute for Research in Economics (SIRE).
  5. FLEURBAEY, Marc & SCHOKKAERT, Erik, 2011. "Behavioral fair social choice," CORE Discussion Papers, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE) 2011043, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).
  6. Patricio Dalton & Sayantan Ghosal, 2012. "Decisions with endogenous frames," Social Choice and Welfare, Springer, Springer, vol. 38(4), pages 585-600, April.
  7. Marc Fleurbaey & Erik Schokkaert, 2013. "Behavioral Welfare Economics and Redistribution," American Economic Journal: Microeconomics, American Economic Association, American Economic Association, vol. 5(3), pages 180-205, August.

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