Behavioural decisions: theory, implications and applications

Abstract

Standard Economics assumes that decision makers carefully reflect and meditate on each alternative. Grounded on evidence from Psychology this thesis relaxes this assumption and develops a theoretical framework with imperfect reflection. We analyse the implications for both Positive and Normative Economics, and for Public Policy and introduce novel applications. We begin in Chapter 1 with a review of the main arguments and results. Chapter 2 develops a decision-making framework with imperfect reflection and studies the implications for Positive Economics. Our approach relies on two key premises: (a) preferences parameters are endogenously determined by choices and (b) the decision maker, due to imperfect reflection, may not fully internalize that effect. A decision problem is labelled 'Standard' (SDP) when the decision maker internalizes the effect and 'Behavioural' (BDP) when she does not. A number of general results are obtained. First, under incomplete and acyclic preferences there exists a solution to both SDP and BDP. Second, BDPs have testable restrictions and they are di¤erent from those of SDPs. Third, for almost all classes of preferences, SDP and BDP are distinguishable from each other. Chapter 3 focuses on the normative implications of our framework in relation to the existing normative approaches to Behavioural Economics. We show that, with imperfect reflection, revealed preferences cannot in general underpin individual welfare, though we offer conditions to recover such a link. The degree of 'autonomy' emerges as a natural normative criterion and offers theoretical grounds for public policy interventions that aim to empower individuals. Chapter 4 extends our framework to an N-person strategic setting. We label 'psycho-social' games to normal-form games in which players, due to imperfect reflection, do not internalize the e¤ect of their actions on their preferences parameters. We prove existence under weak assumptions, link our framework to the existent literature on social preferences and provide new examples. We associate psycho-social games to standard normal-form games and show that, typically, the set of Nash equilibria and the set of psycho-social equilibria of an associated psycho-social game are distinct from each other. Finally, we show that (strict) Nash equilibria in pure strategies are robust to any degree of imperfect reflection. Chapter 5 applies our framework to analyse poverty and polarization persistence as a result of an aspirations failure. Reflection involves imagination which is, in turn, needed to form aspirations: i.e. we can only aspire to what we can imagine. Initial circumstances such us poverty and polarization restrict the scope of people's imagination and consequently of their aspirations. We develop a model consistent with this argument and study the importance of role models to break aspirations failures. Chapter 6 combines experimental data with a survey and shows evidence that the more frustrated people are income-wise, the lower is their propensity to cooperate to provide global (e.g. environment) and national public goods. Finally, chapter 7 concludes and highlights avenues for future research.

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