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Behavioural Decisions and Welfare

Author

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  • Dalton, Patricio

    (University of Warwick)

  • Ghosal, Sayantan

    (University of Warwick)

Abstract

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

Suggested Citation

  • Dalton, Patricio & Ghosal, Sayantan, 2010. "Behavioural Decisions and Welfare," CAGE Online Working Paper Series 06, Competitive Advantage in the Global Economy (CAGE).
    • Handle: RePEc:cge:wacage:06
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    Citations

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    Cited by:

    1. Dalton, P.S. & Ghosal, S., 2011. "Behavioral decisions and policy," Other publications TiSEM a80f5538-2cc4-4e51-91aa-e, Tilburg University, School of Economics and Management.
    2. Manzini, Paola & Mariotti, Marco, 2010. "Moody Choice," IZA Discussion Papers 5005, Institute of Labor Economics (IZA).
    3. Ghosal, Sayantan & Dalton, Patricio, 2013. "Characterizing Behavioral Decisions with Choice Data," CAGE Online Working Paper Series 107, Competitive Advantage in the Global Economy (CAGE).
    4. Peter Kooreman & Henriëtte Prast, 2010. "What Does Behavioral Economics Mean for Policy? Challenges to Savings and Health Policies in the Netherlands," De Economist, Springer, vol. 158(2), pages 101-122, June.
    5. Patricio S. Dalton & Sayantan Ghosal, 2011. "Behavioral Decisions and Policy," CESifo Economic Studies, CESifo Group, vol. 57(4), pages 560-580, December.
    6. Patricio Dalton & Sayantan Ghosal, 2012. "Decisions with endogenous frames," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 38(4), pages 585-600, April.
    7. B. Douglas Bernheim, 2009. "Behavioral Welfare Economics," Journal of the European Economic Association, MIT Press, vol. 7(2-3), pages 267-319, 04-05.
    8. Dalton, P.S. & Ghosal, S., 2010. "Decisions with Endogenous Frames (Replaces CentER DP 2010-21)," Other publications TiSEM c4b257a4-972b-4e4b-a68e-8, Tilburg University, School of Economics and Management.
    9. Patricio S. Dalton & Sayantan Ghosal & Anandi Mani, 2016. "Poverty and Aspirations Failure," Economic Journal, Royal Economic Society, vol. 126(590), pages 165-188, February.
    10. Dalton, P.S. & Ghosal, S., 2010. "Behavioral Decisions and Policy," Other publications TiSEM 01082332-70a3-4949-9de6-6, Tilburg University, School of Economics and Management.
    11. Marc Fleurbaey & Erik Schokkaert, 2013. "Behavioral Welfare Economics and Redistribution," American Economic Journal: Microeconomics, American Economic Association, vol. 5(3), pages 180-205, August.
    12. Dalton, P.S. & Ghosal, S., 2010. "Decisions with Endogenous Frames (Replaces CentER DP 2010-21)," Discussion Paper 2010-142, Tilburg University, Center for Economic Research.
    13. Dalton, P.S. & Ghosal, S. & Mani, A., 2011. "Poverty and Aspirations Failure," Other publications TiSEM 30b6aa68-cb90-42af-ba4d-1, Tilburg University, School of Economics and Management.
    14. Dalton, P.S. & Ghosal, S., 2012. "Decisions with endogenous frames," Other publications TiSEM f80cf7bd-a01d-4a26-bd06-b, Tilburg University, School of Economics and Management.
    15. Paola Manzini & Marco Mariotti, 2015. "State dependent choice," Social Choice and Welfare, Springer;The Society for Social Choice and Welfare, vol. 45(2), pages 239-268, September.
    16. Robin Maialeh, 2019. "Generalization of results and neoclassical rationality: unresolved controversies of behavioural economics methodology," Quality & Quantity: International Journal of Methodology, Springer, vol. 53(4), pages 1743-1761, July.
    17. FLEURBAEY, Marc & SCHOKKAERT, Erik, 2011. "Behavioral fair social choice," LIDAM Discussion Papers CORE 2011043, Université catholique de Louvain, Center for Operations Research and Econometrics (CORE).

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    More about this item

    Keywords

    Behavioural Decisions; Indistinguishabilty; revealed preferences; normative preferences; welfare; paternalism; autonomy; existence;
    All these keywords.

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D62 - Microeconomics - - Welfare Economics - - - Externalities
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • I30 - Health, Education, and Welfare - - Welfare, Well-Being, and Poverty - - - General

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