Behavioral Decisions and Welfare (Replaced by CentER DP 2010-143)

P.S. Dalton, S. Ghosal

Research output: Working paperDiscussion paperOther research output

Abstract

What are the normative implications of behavioral economics? We study a model where the decisions a person makes, consciously or unconsciously, affect her psycholog- ical state (reference point, beliefs, expectations, self-image) which, in turn, impacts on her ranking over available decisions in the first place. We distinguish between stan- dard decisions where the decision-maker internalizes the feedback from her actions to her psychological state, and behavioral decisions where the psychological state is taken as given (although a decision outcome requires that action and psychological state are mutually consistent). In a behavioral 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 di¤erent and the outcomes of the two decision problems are, typically, distinguishable. We discuss the consequences for public policy of our formal analysis and o¤er normative grounds for subsidized psychological therapies.
Original languageEnglish
Place of PublicationTilburg
PublisherMicroeconomics
Number of pages37
Volume2010-22
Publication statusPublished - 2010

Publication series

NameCentER Discussion Paper
Volume2010-22

Keywords

  • Behavioral Decisions
  • Welfare
  • Revealed Preferences
  • Normative Preferences

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    Dalton, P. S., & Ghosal, S. (2010). Behavioral Decisions and Welfare (Replaced by CentER DP 2010-143). (CentER Discussion Paper; Vol. 2010-22). Microeconomics.