Revealed Preferences, Normative Preferences and Behavioral …

[Pages:40]Revealed Preferences, Normative Preferences and Behavioral Welfare Economics

David Laibson Harvard University

January, 2010 AEA Mini-course

Outline:

? Normative preferences ? Revealed preferences ? Active decisions ? Mechanism design example

Normative preferences

? Normative preferences are preferences that society (or you) should optimize

? Normative preferences are philosophical constructs. ? Normative debates can't be settled with only empirical

evidence.

Positive Preferences (aka Revealed Preferences)

? Positive preferences are preferences that predict my choices

? Positive preferences need not coincide with normative preferences.

? What I do and what I should do are potentially different things (though they do have some connections).

? Equivalence between normative preferences and positive preferences is a philosophical position (for a nice defense of this view, see Bernheim and Rangel 2009).

An example:

ParticImippraovtiiongn(fpoarrraatictteyippsaictiaionlnfiir4nm04)011K(kp)lapnslans

Default non-enrollment

(financial incentives alone)

40%

Massive simplification

("check a box")

Active choice

(perceived req't to choose)

Default enrollment

(opt out)

50%

70% 90%

0% 20% 40% 60% 80% 100% Participation Rate (1 year of tenure)

32

These are all positive preferences.

Which is the normative preference?

Active decisions

Carroll, Choi, Laibson, Madrian, Metrick (2009)

Active decision mechanisms require employees to make an active choice about 401(k) participation.

? Welcome to the company ? You are required to submit this form within 30 days of

hire, regardless of your 401(k) participation choice ? If you don't want to participate, indicate that decision ? If you want to participate, indicate your contribution rate

and asset allocation ? Being passive is not an option

Participation Rate in 3rd Month of Tenure

Rate of Participation in the 401(k) plan by month of hire

80% 70% 60% 50% 40% 30% 20% 10%

0%

Jan-9F7eb-9M7ar-9A7pr-9M7ay-9J7un-97Jul-9A7ug-9S7ep-9O7ct-9N7ov-9D7ec-9J7an-9F8eb-9M8ar-9A8pr-9M8ay-9J8un-98Jul-98

Month of hire

Hire Date and 401(k) Participation

Participation Rate in 3rd Month of Tenure

80% 70% 60% 50%

40% 30% 20% 10%

0%

January February

March

April

May

Month of Hire

June

July

Active decision Standard enrollment

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