Welfare economics and bounded rationality: the case for model-based approaches

Manzini, Paola; Mariotti, Marco

doi:10.1080/1350178x.2014.965909

Cited by 33 publications

(39 citation statements)

References 44 publications

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“…The results reported in this paper have important general implications. This paper sheds light on the discussion of the concept of rationality and its robustness (Sugden 1991;Manzini and Mariotti 2014). In line with other existing studies (e.g.…”

supporting

confidence: 87%

“…In light of this, scholars have proposed alternative positive and normative frameworks that encompass non-standard models of choice (e.g. Bernheim 2009;Manzini and Mariotti 2014) or have advocated to completely dismiss welfare analysis based on observed choice behavior (Sen 1985;Sugden 2004;Layard 2005). This paper takes a step back on this debate and experimentally tests whether the rationality assumption indeed breaks down in a context in which individuals make economic decisions under physiological stress.…”

Section: Discussionmentioning

confidence: 99%

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Cortisol meets GARP: the effect of stress on economic rationality

et al. 2019

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Rationality is a fundamental pillar of Economics. It is however unclear if this assumption holds when decisions are made under stress. To answer this question, we design two laboratory experiments where we exogenously induce physiological stress in participants and test the consistency of their choices with economic rationality. In both experiments we induce stress with the Cold Pressor test and measure economic rationality by the consistency of participants' choices with the Generalized Axiom of Revealed Preference (GARP). In the first experiment, participants delay the decision-making task for 20 min until the cortisol level peaks. We find significant differences in cortisol levels between the stressed group and the placebo group which, however, do not affect the consistency of choices with GARP. In a second experiment, we study the immediate effect of the stressor on rationality. Overall, results from the second experiment confirm that rationality is not impaired by the stressor. If anything, we observe that compared to the placebo group, participants are more consistent with rationality immediately after the stressor. Our findings provide strong empirical support for the robustness of the economic rationality assumption under physiological stress.

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confidence: 87%

Section: Discussionmentioning

confidence: 99%

Cortisol meets GARP: the effect of stress on economic rationality

et al. 2019

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“…Therefore, the maximal number of psychological states required to rationalise choice data C satisfying axioms a and c is #A. 33 Manzini and Mariotti (2014) contrast the two existing approaches for welfare economics when agents are bounded rational and make the case for these type of model-based approaches. consideration set and clearly the chosen alternative was revealed preferred to it.…”

Section: Axiomatic Characterisation: Related Literaturementioning

confidence: 99%

“… See Manzini and Mariotti () who contrast a modeless and a model‐based approach to welfare economics in the presence of a boundedly rational decision‐maker and make the case for the model‐based approach. …”

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Self‐Fulfilling Mistakes: Characterisation and Welfare

Dalton

Ghosal

2017

The Economic Journal

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This article incorporates self‐fulfilling mistakes into an otherwise classical decision‐making framework. A behavioural agent makes a mistake when he fails to internalise all the consequences of his actions on himself. We show that Sen's axioms α and γ fully characterise choice data consistent with behavioural agents. These two axioms are weaker than Sen's axioms α and β that fully characterise rational agents. We offer a welfare benchmark that can be applied to existing behavioural economics models and show the conditions under which our welfare ranking can be used to infer welfare dominated (i.e. mistaken) choices using choice data alone.

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Bilateral trade with loss-averse agents

Benkert

2024

Econ Theory

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We introduce expectations-based loss aversion, which can explain the empirically well-documented endowment and attachment effect, into the classical bilateral-trade setting (Myerson and Satterthwaite in J. Econ. Theory 29:265–281, 1983). We derive optimal mechanisms for different objectives and find that relative to no loss aversion, the platform designer optimally provides agents with partial insurance in the ownership dimension and with full insurance in the money dimension. Notably, the former is achieved either by increasing or decreasing the trade frequency, depending on the distribution of types. Finally, we show that the impossibility of inducing materially efficient trade persists with loss aversion.

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Welfare economics and bounded rationality: the case for model-based approaches

Cited by 33 publications

References 44 publications

Cortisol meets GARP: the effect of stress on economic rationality

Cortisol meets GARP: the effect of stress on economic rationality

Self‐Fulfilling Mistakes: Characterisation and Welfare

Bilateral trade with loss-averse agents

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