Behavioural decisions and welfare
Dalton, Patricio Santiago and Ghosal, Sayantan (2008) Behavioural decisions and welfare. Working Paper. Coventry: University of Warwick, Department of Economics. (Warwick economic research papers.
WRAP_dalton_twerp_834.pdf - Requires a PDF viewer such as GSview, Xpdf or Adobe Acrobat Reader
Official URL: http://www2.warwick.ac.uk/fac/soc/economics/resear...
We study decision problems where (a) preference parameters are de.ned to include psychological/moral considerations and (b) there is a feedback effect from chosen actions to preference parameters. In a standard decision problem the chosen action is required to be optimal when the feedback effect from actions to preference parameters is fully taken into account. In a behavioural decision problem the chosen action is optimal taking preference parameters as given although chosen actions and preference parameters are required to be mutually consistent. Our framework unifes seemingly disconnected papers in the literature. We characterize the conditions under which behavioural and standard decisions problems are indistinguishable: in smooth settings, the two decision problems are generically distinguishable. We show that in general, revealed preferences cannot be used for making welfare judgements and we characterize the conditions under which they can inform welfare analysis. We provide an existence result for the case of incomplete preferences. We suggest novel implications for policy and welfare analysis.
|Item Type:||Working or Discussion Paper (Working Paper)|
|Subjects:||H Social Sciences > HB Economic Theory|
|Divisions:||Faculty of Social Sciences > Economics|
|Library of Congress Subject Headings (LCSH):||Decision making, Choice (Psychology), Welfare economics, Externalities (Economics), Mathematical optimization|
|Series Name:||Warwick economic research papers|
|Publisher:||University of Warwick, Department of Economics|
|Place of Publication:||Coventry|
|Date:||5 January 2008|
|Number of Pages:||33|
|Status:||Not Peer Reviewed|
|Access rights to Published version:||Open Access|
|Funder:||Royal Society (Great Britain), Fifth Framework Programme (European Commission) (FP5), Royal Economic Society (Great Britain) (RES), University of Warwick|
|References:|| Appadurai (2004), "The capacity to aspire: Culture and the Terms of Recognition", in V.Rao and M. Walton (Eds.), Culture and Public Action, IBRD-World Bank, Washington DC.  Bade, S. (2005), "Nash equilibrium in games with incomplete preferences," Economic Theory, 26, 309-332.  Bandura, A. (1986), Social foundations of thought and action: A social cognitive theory, Englewood Cliffs, NJ: Prentice Hall Social Foundations of Thought and Action: A Social Cognitive Theory, Bandura (1986)  Bandura, A. (1997), Self-efficacy:The Exercise of Control, New York: Freeman.  Bandura A. (2001) "Social cognitive theory: an agentic perspective," Annual Review of Psychology, 52, 1-26.  Baron J. (2008) Thinking and Deciding, Cambridge University Press, 4th edition, N.Y.  Benabou, R. and J. Tirole (2002) "Self-Con�dence and Personal Motivation," Quarterly Journal of Economics, 117, 3, 871-915.  ____________________ (2003) "Intrinsic and Extrinsic Motivation," The Review of Economics Studies, 70, 3, 489-520.  Benhabib J. and A. Bisin (2004) "Modeling Internal Commitment Mechanisms and Self-Control: A Neuroeconomics Approach to Consumption-Saving Decisions," Games and Economic Behavior, Special Issue on Neuroeconomics, 52(2), 460-92.  Bergstrom, T. C. (1975), "Maximal elements of acyclic relations on compact sets", Journal of Economic Theory, 10(3), 403-404.  Bernheim D. and A. Rangel (2004) "Addiction and Cue-Triggered Decision Processes," American Economic Review, Vol. 94, 5, pp. 1558-1590.  Bernheim D. and A. Rangel (2006) "Beyond Revealed Preference: Toward Choice-Theoretic Foundations for Behavioural Welfare Economics," mimeo, Stanford University.  Carrillo J. D. and T. Mariotti (2000) "Strategic Ignorance as a Self-Discipline Device," Review of Economic Studies, 67(3), 529-44.  Dalton P. and S. Ghosal (2007a) "Chronic Poverty and Aspiration Failures," mimeo, University of Warwick.  ______________ (2007b) "Psycho-Social Equilibria: Theory and Applications," mimeo, University of Warwick.  Debreu, G. (1959), Theory of Value, Wiley, New York.  Elster, J. (1998) "Emotions and Economic Theory," Journal of Economic Literature, Vol 36, No 1, 47-74.  Geanakoplos, J., D. Pearce and E. Stacchetti (1989), "Psychological games and sequential rationality", Games and Economic Behavior, 1, 60-79.  Ghosal, S (2007) "Non-convexity, complementarity and incomplete preferences," mimeo, University of Warwick  Gul F. and W. Pesendorfer (2007) "Harmful Addiction," forthcoming, Review of Economic Studies  Heifetz, A. and E. Minelli (2006), "Aspiration traps," mimeo.  James, W. (1890/1981), The Principles of Psychology, Cambridge, MA: Harvard University Press.  Kahneman, D. and A. Tversky (1979), "Prospect Theory: An analysis of decision under risk," Econometrica, 47(2), 263-91.  Koszegi, B. (2005), "Utility from anticipation and personal equilibrium", mimeo, University of California, Berkeley.  Koszegi, B. and M. Rabin (2006), "A model of reference-dependent preferences," forthcoming, Quarterly Journal of Economics.  _____________________ (2007), "Reference-Dependent Risk Attitudes," American Economic Review,. 97(4), 1047-1073  Lazarus and Flokman (1984), Stress, appraisal and coping, New York, Springer.  Loewenstein G. and T. O�Donoghue (2005) "Animal Spirits: Affective and Deliberative Processes in Economic Behavior," mimeo, Carnegie Mellon University.  Mandler, (2005), "Incomplete preferences and rational intransitivity of choice", Games and Economic Behavior, 50, 255-277.  Milgrom, P. and C. Shannon (1994), "Monotone comparative statics", Econometrica, 62, 157-180.  Pajares, F. (2002), "Overview of social cognitive theory and of self-efficacy", from http://www.emory.edu/EDUCATION/mfp/eff.html.  Pajares F. and D.H. Schunk (2001), "Self-beliefs and school success: self-efficacy, self-concept and school achievement", chapter in R. Riding and S. Rayner (Eds.), (2001), Perception (pp. 239-266), London: Ablex Publishing.  Ray, D. (2006) �Aspirations, Poverty and Economic Change,�in A. Banerjee, R. Benabou and D. Mookherjee (eds) Understanding Poverty, Oxford University Press  Rubinstein A. and Salant Y. (2007) "Choice with Frames," mimeo, New York University.  Sen A. (1977) "Rational Fools: A Critique of the Behavioral Foundations of Economic Theory," Philosophy and Public A¤airs, 6, 4, 317-344.  Shafer, W. and H. Sonnenschein (1975), "Equilibrium in abstract economies without ordered preferences," Journal of Mathematical Economics, 2, 345-348.  Shalev, J. (2000), "Loss aversion equilibrium," International Journal of Game Theory, 29, 269-87.  Shefrin, H. M. and R. H. Thaler (1988) �The Behavioral Life-Cycle Hypothesis,� Economic Inquiry, 26, 609-643.  Scho�el, N. (1984), "Existence of equilibrium in a manifold," Mathematics of Operations Research, 9, 545-557.  Stern N., J-J. Dethier and F. H. Rogers (2005) Growth and Empowerment. Making Development Happen, Munich Lectures in Economics, The MIT Press, Cambridge, Massachusetts, and London, England  Tversky, A. and D. Kahneman (1991), "Loss aversion in riskless choice: A reference-dependent model", Quarterly Journal of Economics, Vol. 106(4), 1039-1061.  World Bank (2002) Empowerment and Poverty Reduction: A Sourcebook, preliminary draft, pp. 280.|
Actions (login required)