When normative and descriptive diverge: how to bridge the difference

Revealed preferences are not consistent. Many anomalies have been found in different contexts. This finding leads to a divergence between normative and descriptive analyses. There are several ways of facing this problem. In this paper we argue in favour of debiasing observed choices in such a way th...

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Bibliographic Details
Published in:Social choice and welfare 2012-04, Vol.38 (4), p.569-584
Main Authors: Pinto-Prades, Jose-Luis, Abellan-Perpiñan, Jose-Maria
Format: Article
Language:English
Subjects:
Allocation
Behavioral decision theory
Cognitive ability
Decision making
Divergence
Economic Theory/Quantitative Economics/Mathematical Methods
Economic utility
Economics
Economics and Finance
Errors
Expected utility
Game Theory
Health Care Services
Health outcomes
Hypotheses
International Political Economy
Libertarianism
Libertarians
Loss aversion
Normativity
Original Paper
Paternalism
Philosophy
Preferences
Prospect theory
Public Finance
Research methods
Resource allocation
Revealed preferences
Social and Behav. Sciences
Social Policy
Studies
Theories
Utility theory
Validity
Weighting functions
Welfare economics
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Summary:Revealed preferences are not consistent. Many anomalies have been found in different contexts. This finding leads to a divergence between normative and descriptive analyses. There are several ways of facing this problem. In this paper we argue in favour of debiasing observed choices in such a way that the "true" preferences are discovered. Our procedure is based on quantitative corrections derived from assuming the descriptive validity of prospect theory and the normative validity of expected utility theory. Those corrective formulas were first applied by Bleichrodt et al. (Manag Sci 47: 1498-1514, 2001). We explain here how such formulas can be used to avoid inefficient allocation of health care resources. This approach shares the philosophy of libertarian paternalism (LP). However, it reduces some of the potential problems of LP: the definition of error (and the need to nudge people) is more clear and objective. In this sense, it reduces the chances that the regulator tries to nudge people toward behaviour based on her preferences rather than those of the people she is nudging.
ISSN:0176-1714
1432-217X
DOI:10.1007/s00355-012-0655-5