Behavioral decisions and welfare

What are the normative implications of behavioral economics? We study a model where the decisions a person makes, consciously or unconsciously, a¤ect her psychological state (reference point, beliefs, expectations, self-image) which, in turn, impacts on her ranking over available decisions in the �rst place. We distinguish between standard decisions where the decision-maker internalizes the feedback from her actions to her psychological state, and behavioral decisions where the psychological state is taken as given (although a decision outcome requires that action and psychological state are mutually consistent). In a behavioral decision, the individual imposes an externality on herself. We provide an axiomatic characterization of behavioral decisions. We show that the testable implications of behavioral and standard decisions are di¤erent and the outcomes of the two decision problems are, typically, distinguishable. We discuss the consequences for public policy of our formal analysis and o¤er normative grounds for subsidized psychological therapies