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:

To determine the direction of a nudge we need a welfare criterion.

(1) based on decision utility

(2) based on experience utility

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 findings in this course showed that revealed preferences are not necessarily in line with what is best for us.

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.

Welfare criteria based on ordinal utility

Kahneman: public policy should be informed by experience utility.

OECD