A Measure of Rationality and Welfare

Abstract

Abstract. There is ample evidence to show that choice behavior often deviates from the classical principle of maximization. This evidence raises at least two important questions: (i) how severe the deviation is and (ii) which method is the best for extracting relevant information from the choices of the individual for the purposes of welfare analysis. In this paper we address these two questions by proposing a set of foundational conditions on which to build a proper measure of the rationality of individuals, and enable individual welfare analysis of potentially inconsistent subjects, all based on standard revealed preference data. In our first result, we show that there is a unique measure of rationality that satisfies all of the proposed axioms: the weighted-loss indices. In the second part of the paper, we study some relevant properties of weighted-loss indices.

Revealed preference theory: An algorithmic outlook

“…In the latter paper, it is also shown that computing the money pump index for the most and least severe violations can be done in polynomial time. Furthermore, Apesteguia and Ballester (2015) introduce the minimal swaps index. Informally, the swaps index of a given preference ordering over the alternatives is calculated by counting how many better alternatives (according to the preference order) were not chosen over all choice situations.…”

Homothetic Efficiency: Theory and Applications

“…Echenique, Lee, and Shum (2011) provided a new measure based on a money pump argument, and Dean and Martin (2015) provided a new measure based on the minimum cost of breaking all cycles or money pumps. Apesteguia and Ballester (2015) provided a measure based on welfare loss.…”

Pareto-optimal matching allocation mechanisms for boundedly rational agents

“…The minimal game tree that may explain boundedly rational behavior following Xu and Zhou (2007) has two agents and two nodes. Kalai (2002), Ambrus and Rozen (2015), Apesteguia and Ballester (2014) and Manzini and Mariotti (2012) define yet further measures of irrationality.…”