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

See all articles by Patricio S. Dalton

Patricio S. Dalton

Tilburg University - Center for Economic Research (CentER)

Sayantan Ghosal

University of Glasgow - Adam Smith Business School

Multiple version iconThere are 2 versions of this paper

Date Written: December 21, 2010

Abstract

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

Dalton, Patricio S. and Ghosal, Sayantan, Behavioral Decisions and Welfare (December 21, 2010). CentER Discussion Paper Series No. 2010-143 (revision of 2010-22, 28 February 2010). Available at SSRN: https://ssrn.com/abstract=1570978 or http://dx.doi.org/10.2139/ssrn.1570978

Patricio S. Dalton (Contact Author)

Tilburg University - Center for Economic Research (CentER) ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands

Sayantan Ghosal

University of Glasgow - Adam Smith Business School ( email )

Glasgow, Scotland
United Kingdom

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