Behavioral Decisions and Welfare

Allowing for the possibility that individuals may not always act in their best interest, what is the connection between choice and welfare? This paper addresses this concern by studying the normative implications of a general model of individual decision-making that allows for suboptimal behavior. In a behavioral decision, the individual may not always internalize all the consequences of own choices on himself. We show that behavioral decisions impose clear restrictions on choice data (characterized by Chernoff's axiom and a minimal consistency axiom). We show that, for fixed preferences, behavioral and rational decision-making are, typically, distinguishable. Moreover, we show that under specific circumstances, it is possible to identify the divergence of choice and welfare on the basis of choice data alone