Behavioral Decisions and Welfare
37 Pages Posted: 22 Dec 2011
Date Written: December 16, 2011
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: Suggested Citation