Behavioral Decisions and Welfare (Replaces CentER DP 2010-22)

P.S. Dalton, S. Ghosal

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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.
Original languageEnglish
Place of PublicationTILBURG
PublisherFaculteit der Economische Wetenschappen
Number of pages38
Volume2010-143
Publication statusPublished - 2010

Publication series

NameCentER Discussion Paper
Volume2010-143

Keywords

  • Behavioral Decisions
  • Revealed and Normative Preferences
  • Welfare
  • Axiomatic characterization

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    Dalton, P. S., & Ghosal, S. (2010). Behavioral Decisions and Welfare (Replaces CentER DP 2010-22). (CentER Discussion Paper; Vol. 2010-143). Faculteit der Economische Wetenschappen.