Behavioral Decisions and Welfare
CentER Discussion Paper Series No. 2010-143 (revision of 2010-22, 28 February 2010)
38 Pages Posted: 22 Mar 2010 Last revised: 22 Jul 2011
Date Written: December 21, 2010
If decision-makers (DMs) do not always do what is in their best interest, what do choices reveal about welfare? This paper shows how observed choices can reveal whether the DM is acting in her own best interest. We study a framework that relaxes rationality in a way that is common across a variety of seemingly disconnected positive behavioral models and admits the standard rational choice model as a special case. We model a behavioral DM (boundedly rational) who, in contrast to a standard DM (rational), does not fully internalize all the consequences of her own actions on herself. We provide an axiomatic characterization of choice correspondences consistent with behavioral and standard DMs, propose a choice experiment to infer the divergence between choice and welfare, state an existence result for incomplete preferences and show that the choices of behavioral DMs are, typically, sub-optimal.
Keywords: Behavioral Decisions, Welfare, Revealed Preferences, Normative Preferences
JEL Classification: D03, D60, I30
Suggested Citation: Suggested Citation