The Inner Rational Agent

Abstract

Chapter 4 reviews ‘behavioural welfare economics’—the approach to normative analysis that is favoured by most behavioural economists. This approach assumes that people have context-independent ‘true’ or ‘latent’ preferences which, because of psychologically-induced errors, are not always revealed in actual choices. Behavioural welfare economics aims to reconstruct latent preferences by identifying and removing the effects of error on decisions, and to design policies to satisfy those preferences. Its implicit model of human agency is of an ‘inner rational agent’ that interacts with the world through an imperfect psychological ‘shell’. I argue that there is no satisfactory evidence to support this model, and no credible psychological foundation for it. Since the concept of true preference has no empirical content, the idea that such preferences can be reconstructed is a mirage. Normative economics needs to be more radical in giving up rationality assumptions.