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Behavioral economics lect 7: nudge part 3 (Direction in which to nudge…
Behavioral economics lect 7: nudge part 3
Welfare criteria
Developing a nudge
In which direction?
How?
Whom to nudge?
Direction in which to nudge
Are people better off when, for example, saving more for retirement
and living healthier lives?
Possible welfare criteria:
(1) based on decision utility
(2) based on experience utility
To determine the direction of a nudge we need a welfare criterion.
History
This view was popular for at least a century after.
Early 20th century: ordinal utility and revealed preference
Bentham published “An introduction to the Principles of Morals and Legislation” in 1789 : Utility is moment to moment pleasure and pain.
Welfare criteria based on ordinal utility
Disadvantages of decision utility:
The
Pareto criterion, based on ordinal utility, cannot be used
to compare situations A and B where some people are better off in A and others better off in B.
Preferences change over time
, so which preference to take when evaluating situations?
If utility is ordinal,
only ranking can be measured,
not strength of preference between different situations.
The findings in this course showed that revealed preferences are not necessarily in line with what is best for us.
Welfare criteria based on ordinal utility
Kahneman: public policy should be informed by experience utility.
OECD