Behavioural Decisions and Welfare

Patricio Dalton () and Sayantan Ghosal

The Warwick Economics Research Paper Series (TWERPS) from University of Warwick, Department of Economics

Abstract: We study decision problems where (a) preference parameters are defined 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.

Keywords: Decisions; psychology; indistinguishability; revealed preferences; welfare; existence; aspirations (search for similar items in EconPapers)
JEL-codes: C61 D01 D62 I30 (search for similar items in EconPapers)
Pages: 33 pages
Date: 2008
New Economics Papers: this item is included in nep-cbe, nep-evo, nep-hap, nep-mic and nep-upt
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Citations: View citations in EconPapers (8)

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Related works:
Working Paper: Behavioural Decisions and Welfare (2010)
Working Paper: Behavioural Decisions and Welfare (2008)
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Persistent link: https://EconPapers.repec.org/RePEc:wrk:warwec:834

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