In this Barcelona GSE Research Spotlight Video, Professors Jose Apesteguia (ICREA-UPF and Barcelona GSE) and Miguel A. Ballester (UAB and Barcelona GSE) outline the challenges of analyzing individual decision-making and propose a new method for doing so that measures human inconsistency and welfare costs.
Apesteguia and Ballester have a paper on this topic, "A Measure of Rationality and Welfare," forthcoming in the Journal of Political Economy later this year.
The first joint approach to measuring rationality and welfare
In their paper, the authors point out that although inconsistency and welfare loss are closely related, previous research on individual behavior has considered them separately. The method proposed by Apesteguia and Ballester is the first to incorporate both rationality and welfare when evaluating individual choice behavior.
"We know that people don't always make the best choices," Prof. Ballester reflects in the video. "If we want to measure individual behavior, we have to bring human error into the equation."
A tool for prediction and policymakers
Having a method for measuring human inconsistency and welfare loss in the decision-making process could be helpful for public institutions when considering the implementation of a new policy.
"We may wonder if there are preferences that are the closest representation of an individual's choices," Prof. Apesteguia says. "This is important for predictive purposes or even for public decisions."
About the authors
Jose Apesteguia (PhD, Universidad Pública de Navarra) is ICREA Research Professor at UPF. His work focuses on individual decision-making with an emphasis on its psychological foundations.
Miguel Angel Ballester (PhD, Universidad Pública de Navarra) is Associate Professor at UAB and Researcher at MOVE. His research interests include social choice and decision theory.