ABSTRACT
Chapter 2 discusses preferences and choices in economics. Conventional economic approach relies on the theory of revealed preferences, in which the concept of preferences is entirely defined in terms of choice and has no psychological meaning. Behavioral economists have questioned the satisfaction of revealed preferences as the normative foundation of welfare economics. Psychological factors, such as limited attention, inferior cognitive abilities, or lack of self-control, can operate against the satisfaction of individual’s true preferences. If individuals make mistakes, and if these mistakes are systematic, it might be possible to make them better off by restricting their choices and putting attractive bad choices off limits. Thus, it is feasible to improve welfare by restricting or altering individual choice. If the true preference set is reconstructed, the satisfaction of these preferences could be used as a basis for welfare-enhancing policy proposals.
