Self-fulfilling Mistakes: Characterization and Welfare

This paper incorporates self-fulfilling mistakes into an otherwise classical decision-making framework. A behavioural agent makes a mistake when he fails to internalize all the consequences of his actions on himself. We show that Sen's axioms α and γ fully characterize choice data consistent with behavioral agents. These two axioms are weaker than Sen's axioms α and β that fully characterize rational agents. We offer a welfare benchmark that can be applied to existing behavioural economics models and show the conditions under which our welfare ranking can be used to infer welfare dominated (i.e. mistaken) choices using choice data alone.