A Measure of Rationality and Welfare
Jose Apesteguia, Miguel A. Ballester
Journal of Political Economy Volume 123, Number 6 December 2015
Evidence showing that individual behavior often deviates from the classical principle of preference maximization has raised at least two important questions: (1) How serious are the deviations? (2) What is the best way to analyze choice behavior in order to extract information for the purpose of welfare analysis? This paper addresses these questions by proposing a new way to identify the preference relation that is closest, in terms of welfare loss, to the revealed choice.
