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Behavioural Decisions and Welfare

  • Dalton, Patricio; Ghosal, Sayantan

    (University of Warwick)

What are the normative implications of behavioral economics? We study a model where the decisions a person makes, consciously or unconsciously, affect her psychological state (reference point, beliefs, expectations, self-image) which, in turn, impacts on her ranking over available decisions in the first place. We distinguish between standard decisions where the decision-maker internalizes the feedback from her actions to her psychological state, and behavioural decisions where the psychological state is taken as given (although a decision outcome requires that action and psychological state are mutually consistent). In a behavioural decision, the individual imposes an externality on herself. We provide an axiomatic characterization of behavioral decisions. We show that the testable implications of behavioral and standard decisions are different and the outcomes of the two decision problems are, typically, distinguishable. We discuss the consequences for public policy of our formal analysis and over normative grounds for subsidized psychological therapies

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Paper provided by Competitive Advantage in the Global Economy (CAGE) in its series CAGE Online Working Paper Series with number 06.

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Date of creation: 2010
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Handle: RePEc:cge:wacage:06
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Web page: http://www2.warwick.ac.uk/fac/soc/economics/research/centres/cage/

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