I'm not very familiar with behavioral economics, but as a recommendation of a teacher I'm reading "A Behavioral New Keynesian Model" by Xavier Gabaix. There's a part that I don't understand, here it goes:

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And the footnote says:

In particular I use the objective (not subjective) expectations. Also, I do not include thinking costs in the welfare. One reason is that thinking costs are very hard to measure (revealed preference arguments apply only if attention is exactly optimally set, something which is controversial). In the terminology of Farhi and Gabaix (2015), we are in the “no attention in welfare” case.

What does he mean with "This is as in much of behavioral economics, which views behavioral agents as using heuristics, but experience utility from consumption and leisure like rational agents"? Which author says that behavioral agents has utility like rational agents?

Thanks in advance.


1 Answer 1


I don't know the paper, but I can make a general point.

In behavioral economics, agents do not arrive at their optimal choice by maximizing a standard expected utility function. They may maximize some function with other characteristics or, alternatively, they use heuristics to make choices. That is, they may end up with a choice that is not optimal in terms of "objective" expected utility. This paper uses this objective expected utility as welfare criterion - with the true probabilities and true outcomes, not the perceived probability weights or perceived outcomes that led to the choice of the agent. The argument behind this approach is that although the agent makes choices according to a perceived world, he experiences utility in the true world. Therefore, instead of using the expected utility perceived when making the choice as a welfare measure, it makes sense to use the "objective" expectation of the objectively experienced utility.

I interpret the footnote without having read the paper: The agent uses subjective probability weights to make choices and incurs 'thinking costs'. The welfare measure ignores these thinking costs.


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