Behavioral Decisions and Welfare

37 Pages Posted: 22 Dec 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 16, 2011

Abstract

Allowing for the possibility that individuals may not always act in their best interest, what is the connection between choice and welfare? This paper addresses this concern by studying the normative implications of a general model of individual decision-making that allows for suboptimal behavior. In a behavioral decision, the individual may not always internalize all the consequences of own choices on himself. We show that behavioral decisions impose clear restrictions on choice data (characterized by Chernoff's axiom and a minimal consistency axiom). We show that, for fixed preferences, behavioral and rational decision-making are, typically, distinguishable. Moreover, we show that under specific circumstances, it is possible to identify the divergence of choice and welfare on the basis of choice data alone.

Keywords: Behavioral decisions, revealed and normative preferences, welfare, axiomatic characterization

JEL Classification: D03, D60, I30

Suggested Citation

Dalton, Patricio S. and Ghosal, Sayantan, Behavioral Decisions and Welfare (December 16, 2011). Netspar Discussion Paper No. 12/2011-097. Available at SSRN: https://ssrn.com/abstract=1975326 or http://dx.doi.org/10.2139/ssrn.1975326

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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