Reconciling normative and behavioural economics: the problems to be solved

Abstract

We review the problem of reconciling normative and behavioural economics. In conventional welfare economics, individuals' preferences are assumed to be coherent, and the satisfaction of those preferences is the normative criterion; but this approach breaks down if preferences are incoherent. Traditionally, the preference-satisfaction criterion has been interpreted in three conceptually different ways, emphasising respectively the normative value of happiness, self-assessed well-being, and freedom. If individuals' preferences are incoherent, these interpretations diverge, leading to fundamentally different strategies for dealing with the reconciliation problem, and new questions are raised about whether normative economics should be addressed to governments or individuals.For at least the last three quarters of a century, both descriptive and normative economics have been based on assumptions about individual rationality. In descriptive economics, economic agents have been assumed to act as if seeking to satisfy preferences that are coherent-that is, stable, consistent and context-independent. In normative analysis, economic institutions, projects or policies have been treated as justified to the extent that their outcomes are ranked highly in the preference orderings that agents have been assumed to possess. From the early 1980s, however, there have been increasingly evident signs that economics might be changing direction, towards what has come to be called the behavioural approach. There has been an accumulation of work which tests rationality assumptions at the individual level, often in controlled experiments, and finds systematic 'anomalies' (that is, deviations from received theory). There has been growing interest in developing psychologically-based theories to explain

Choosing vs. allocating: discrete choice experiments and constant‐sum paired comparisons for the elicitation of societal preferences

“…As mentioned, the number of patients treated changed as respondents moved the budget slider, potentially highlighting this attribute. In the light of qualitative evidence that suggests SP respondents may reduce abstract, macrolevel allocation problems to more comprehensible two‐person analogies, such an effect may be an advantage in ‘nudging’ respondents back towards a macrolevel perspective . These results must be interpreted cautiously, though, given the relatively small sample sizes and the less than optimal application of the experimental design.…”

Recent Trends in Economic Methodology: A Literature Review

“…preference reversals, loss-aversion, framing effects, hyperbolic discounting, and anchoring effects) have cast doubt not only on standard rational choice and microeconomic theory, but also on the 'standard methods of normative analysis' traditionally employed in welfare economics. According to McQuillin and Sugden (2012), the fundamental theorems of welfare economics are based on the typical assumptions about coherent individual preferences in line with instrumental rationality. Therefore, the behavioural 'anomalies' that represent a challenge to rationality, are also a challenge to the standards by which applied welfare economics determines which goals are socially desirable.…”

Toward A Behavioral Foundation of Normative Economics

“…In general, BNE can be conceptualized as the set of all attempts to modify standard normative economics so that it is better aligned -or 'reconciled' (McQuillin and Sugden, 2012) -with insights from behavioral economics and can be coherently applied in a behavioral world, i.e., a world where individuals have limited computational capacities, attention, and willpower. The project begins from the basic insight that economists' standard notion of welfare (which defines welfare, essentially, as the degree of satisfaction of given consistent preferences) cannot easily apply to a behavioral setting where preferences are often incomplete and unstable (Hausman and McPherson, 2009).…”