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When normative and descriptive diverge: how to bridge the difference

Listed author(s):
  • Jose-Luis Pinto-Prades

    ()

  • Jose-Maria Abellan-Perpiñan

    ()

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://hdl.handle.net/10.1007/s00355-012-0655-5
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Article provided by Springer & The Society for Social Choice and Welfare in its journal Social Choice and Welfare.

Volume (Year): 38 (2012)
Issue (Month): 4 (April)
Pages: 569-584

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Handle: RePEc:spr:sochwe:v:38:y:2012:i:4:p:569-584
DOI: 10.1007/s00355-012-0655-5
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  1. Beshears, John & Choi, James J. & Laibson, David & Madrian, Brigitte C., 2008. "How are preferences revealed?," Journal of Public Economics, Elsevier, vol. 92(8-9), pages 1787-1794, August.
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  25. 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, vol. 63(3), pages 205-231, November.
  26. Jack Knetsch & Fang-Fang Tang & Richard Thaler, 2001. "The Endowment Effect and Repeated Market Trials: Is the Vickrey Auction Demand Revealing?," Experimental Economics, Springer;Economic Science Association, vol. 4(3), pages 257-269, December.
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