Welfare and the Act of Choosing

The standard revealed-preference approach to welfare economics encounters fundamental difficulties when the act of choosing directly affects welfare through emotions such as guilt, pride, and anxiety. We address this problem through an approach that redefines consumption bundles in terms of the sensations they produce, and measures welfare by blending methods involving choice and subjective well-being. In a laboratory experiment on redistributive preferences, and in surveys concerning consequential economic decisions, we find that revealed-preference methods, including those that exploit choices over menus, mismeasure welfare because preferences depend on choice sets, while happiness and satisfaction are not sufficient statistics for welfare.