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Behavioral Welfare Economics

Theories from Behavioral Economics are playing increasingly important roles in economic policy analysis and policy making, where evaluation (welfare analysis) is essential. Conceptual concerns arise because standard welfare economics defers to choice. Does this deference still make sense if choices exhibit inconsistencies or reflect cognitive biases? Behavioral Welfare Economics is critical because it provides foundations for drawing normative conclusions in these settings.

My work in this area has focused on the development and application of a framework for conducting behavioral welfare analysis. The antecedents of the framework are detectable in papers such as “Addiction and Cue-Triggered Decision Processes” (AER 2004, with Antonio Rangel). The framework’s first formal articulation appears in “Beyond Revealed Preference” (QJE 2009, with Antonio Rangel), but it has since evolved. I am currently working on a book that sets forth the entire framework, starting with philosophical foundations and proceeding through applications. I hope to complete that project by mid-2022. Meanwhile, the best summaries of the framework appear in “In Defense of Behavioral Welfare Economics” (JEM, forthcoming), Section 1 of “Behavioral Public Economics” (Handbook of Behavioral Economics, 2018, with Dmitry Taubinsky), and “The Good, the Bad, and Ugly: A Unified Approach to Behavioral Weflare Economics” (JBCA, 2016). Links to these and other papers appear below.

I've also recorded two lectures, each roughly one hour in length, on Behavioral Welfare Economics. Links to these videos appear in the right-hand column below. In addition, I've included a video lecture on "Choice and Welfare," which I prepared for a first-year PhD class in Microeconomics. It overlaps a bit with the first of the two lectures on Behavioral Welfare Economics, but also covers some additional issues that provide important background, particularly regarding philosophical foundations. 

Publications

Lectures

Collaborators

  • Sandro Ambuehl
    Assistant Professor, University of Zurich
  • Fulya Ersoy
    Assistant Professor, Loyola Marymount University
  • Andrey Fradkin
    Assistant Professor, Questrom School of Business, Boston University
  • Donna Harris
    Research Fellow at the Centre of the Study of African Economies, Department of Economics, University of Oxford
  • Annamaria Lusardi
    University Professor of Economics & Accountancy, and Academic Director, Global Financial Literacy Excellence Center (GFLEC), George Washington University
  • Jonas Mueller-Gastell
    Student, Stanford
  • Igor Popov
    Chief Economist, Apartment List
  • Antonio Rangel
    Bing Professor of Neuroscience, Behavioral Biology and Economics at the California Institute of Technology
  • Dmitry Taubinsky
    Assistant Professor, UC Berkeley

Behavioral Public Economics

This chapter surveys work in behavioral public economics, emphasizing the normative implications of non-standard decision making for the design of welfare-improving and/or optimal policies. We highlight combinations of theoretical and empirical approaches that together can produce robust qualitative and quantitative prescriptions for optimal policy under a range of assumptions concerning consumer behavior. The chapter proceeds in four parts.

Peer Advice on Financial Decisions: A Case of the Blind Leading the Blind?

Previous research shows that many people seek financial advice from non-experts, and that peer interactions influence financial decisions. We investigate whether such influences are beneficial, harmful, or simply haphazard. In our laboratory experiment, face-to-face communication with a randomly assigned peer significantly improves the quality of private decisions, measured by subjects' ability to choose as if they properly understand their opportunity sets. Subjects do not merely mimic those who know better, but also make better private decisions in novel tasks.

Evaluating Deliberative Competence: A Simple Method with an Application to Financial Choice

We introduce a method for experimentally evaluating interventions designed to improve the quality of choices in settings where people imperfectly comprehend consequences. Among other virtues, our method yields an intuitive sufficient statistic for welfare that admits formal interpretations even when consumers suffer from biases outside the scope of analysis. We use it to study a financial education intervention, which we find improves the quality of decisions only when it incorporates practice and feedback, contrary to the implications of analyses based on conventional efficacy metrics.

Optimal Default Options: The Case for Opt-Out Minimization

We examine the desirability of opt-out minimization, a well-known and simple rule of thumb for setting default options such as passively selected contribution rates in employee-directed pension plans. Existing results suggest that this strategy is welfare-optimal only under highly restrictive assumptions. In this paper, we dispense with those assumptions and demonstrate far more generally that opt-out minimization is approximately optimal. Our main results require only a small number of weak regularity conditions.

Addiction and Cue-Triggered Decision Processes

We propose a model of addiction based on three premises: (i) use among addicts is frequently a mistake; (ii) experience sensitizes an individual to environmental cues that trigger mistaken usage; (iii) addicts understand and manage their susceptibilities. We argue that these premises find support in evidence from psychology, neuroscience, and clinical practice. The model is tractable and generates a plausible mapping between behavior and the characteristics of the user, substance, and environment.

The Welfare Economics of Default Options in 401(k) Plans

Default contribution rates for 401(k) pension plans powerfully influence choices. Potential causes include opt-out costs, procrastination, inattention, and psychological anchoring. Using realistically parameterized models, we show how the optimal default, the magnitude of the welfare effects, and the degree of normative ambiguity depend on the behavioral model, the scope of the choice domain deemed welfare-relevant, the use of penalties for passive choice, and other 401(k) plan features.

The Good, the Bad, and the Ugly: A Unified Approach to Behavioral Welfare Economics

This paper discusses the ways in which behavioral economics challenges the premises of conventional welfare economics. It proposes revised premises that survive those challenges and sets forth a welfare framework derived from that foundation. It argues that the proposed framework is practical, in the sense that it lends itself to applications, as well as unifying, in the sense that it subsumes other approaches and illuminates the relationships between them.

From Neuroscience to Public Policy: A New Economic View of Addiction

A growing consensus in neuroscience regarding how addictive substances affect the brain supports the view that the consumption of addictive substances is sometimes rational, and sometimes a cue-triggered mistake. Neuroscientists have gained considerable insight into the specific processes that appear responsible for decisionmaking malfunctions involving addictive substances, and into the conditions under which these malfunctions occur. These insights lead to a new economic theory of addiction that bridges the gap between neuroscience and public policy.

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