Revealed Preference

5 Key excerpts on "Revealed Preference"

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  Consistency, Choice, and Rationality

  • Walter Bossert, Kotaro Suzumura, Kōtarō Suzumura(Authors)
  • 2010(Publication Date)
  • Harvard University Press

    (Publisher)

  . . in the development of the doctrine of ‘Revealed Preference.’ Dare I confess that when I first heard this term . . . I thought that perhaps to some latter-day saint, in some new Patmos off the coast of Massachusetts, the final solution of all these myster-ies had been revealed in a new apocalypse? But alas! it does not mean that; all it means is that we are to construct an account of the consumer’s behav-ior simply by observing, or rather imagining ourselves to observe, all the acts of choice which he performs in the market, without making any assumption about what goes on in his mind when he makes them.” Since the declared purpose of Samuelson’s Revealed Preference theory was to free the theory of consumer’s behavior from the notion of utility, Robertson’s 1.7 Reference-Dependent Choice 21 view of the nature of this theory is understandable. But Samuelson’s (1948, p. 243) own remark regarding the revelation of a preference pattern by individual market behavior (already quoted in the next-to-last paragraph of Section 1.4) reminds us of the fact that his theory is not really uncon-cerned with what goes on in the consumer’s mind when he or she performs in the competitive markets. Despite this and other ambiguities that surrounded the evolution of Revealed Preference theory, an important fact remains. As Mas-Colell (1982, p. 72) rightly observed, “[r]evealed preference is as foundational and purely theoretical a subject as one can find, and one cannot help thinking that this is part of its fascination. Indeed, of how many topics can it be said, to paraphrase what Samuelson wrote in the Georgescu-Roegen Festschrift, people will be discussing them a hundred years from now? Certainly, the pure theory of rational choice is one.” It is Samuelson’s Revealed Preference theory that not only opened the gate toward a general theory of rational choice, but also devised the most fundamental axiom around which the whole subsequent work evolved over seventy years.

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  Identification for Prediction and Decision

  • Charles F. Manski(Author)
  • 2009(Publication Date)
  • Harvard University Press

    (Publisher)

  III Predicting Choice Behavior 13 Revealed Preference Analysis We have throughout this book found many reasons why researchers and planners may want to study choice behavior. Chapter 2 emphasized that outcome data are often missing by choice, and Chapter 4 discussed how economists use selection models to point-identify outcome distributions. In Chapter 7 we observed that noncompliance with assigned treatments in randomized experiments is a choice made by experimental subjects. Chapters 10 and 11 considered prediction of outcomes and evaluation of welfare when treatment choice is decentralized. Chapters 13 through 15 study prediction of choice behavior as a problem of predicting treatment response. In these chapters, a treatment is a choice set—a set of feasible actions among which a person must choose. A potential outcome is the action that a person would choose if he were to face a specified choice set. As elsewhere in the analysis of treatment response, the conclusions that may be drawn about choice behavior depend on the available data and on the assumptions brought to bear. This opening chapter scrutinizes the prevalent economic practice of Revealed Preference analysis, which combines data on the choices actually made by a study population with assumptions about their decision processes. Revealed Preference analysis can be a powerful predictive tool, but only if one is willing to maintain strong assumptions that can be difficult to motivate. Thus the Law of Decreasing Credibility asserts itself again. 260 13. Revealed Preference Analysis 13.1 Revealing the Preferences of an Individual The original form of Revealed Preference analysis introduced by Samuel-son (1938, 1948) considered the classical economic problem of pre-dicting the commodity demands of a person with a given income when commodities have given prices. Samuelson supposed that a researcher observes the consumption bundles that a person chooses in various income-price settings.

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  Preference Data for Environmental Valuation

  Combining Revealed and Stated Approaches

  • John Whitehead, Tim Haab, Ju-Chin Huang(Authors)
  • 2012(Publication Date)
  • Routledge

    (Publisher)

  et al. (1996) assessed a large number of studies, and demonstrated that the tendency was for Revealed Preference values to exceed stated preference values. In these cases, the maintained hypothesis was that Revealed Preference approaches provided valid measures of welfare, against which stated preferences could be tested.

  Much has changed since economists began comparing results of the two approaches to valuation. We have a much clearer idea of the strengths and weaknesses of each approach and most researchers view each approach as advantageous in the appropriate setting. For Revealed Preferences, there is no apparent incentive problem. It is in the agent’s best interest to minimize the costs of obtaining a given level of well-being, which is the behavioral assumption of Revealed Preferences—all commodities and services are chosen optimally. In practice, recovery of values from observations on behavior runs into two kinds of problems: non-optimizing behavior that provides the basis for behavioral economics2 and econometric problems. For the most part, the assumption of optimizing behavior for Revealed Preference activities seems relatively innocuous, with the possible exception of housing purchases. Econometric problems are not so easily dismissed. A variety of econometric issues, from measurement errors in data to unobserved individual heterogeneity, plague the estimation of structural models that lead to valuation. Intensive efforts to eliminate unobserved individual heterogeneity have led to models with practically no focus on behavior, such as the housing study of Chay and Greenstone (2005) (which given its use of subjective assessment of housing values, might as easily be described as stated preferences). Some problems, such as the value of travel time in various travel cost models, have a considerable impact on valuation but remain stubbornly resistant to satisfying solutions. Anyone dissatisfied with a welfare measure from a travel cost model can make a new assumption about the value of travel time to obtain another result. Consequently, while new models such as the generalized corner solution model Phaneuf et al.

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  Rational Decisions

  • Ken Binmore(Author)
  • 2008(Publication Date)
  • Princeton University Press

    (Publisher)

  utility as a measure of the pleasure or pain a person feels as a result of a decision being made. Perhaps he thought that some kind of metering device might eventually be wired into Pandora’s brain that would show how many units of utility (utils) she was experiencing. This is a less bold hypothesis than it may once have seemed, since we now know that rats will pull a lever that activates an electrode embedded in a pleasure center in their brains in preference to anything else whatever—including sex and food. It is therefore unsurprising that a modern school of behavioral economists have reverted to this classical understanding of the nature of utility. A more specialized group devote their attention specifically to what they call happiness studies. However, the theory of Revealed Preference remains the orthodoxy in economic theory (Mas-Collel et al. 1995).

  1.5.1 Freeing Economics from Psychology

  Economists after Bentham became increasingly uncomfortable, not only with the naive hypothesis that our brains are machines for generating utility, but with all attempts to base economics on psychological foundations. The theory of Revealed Preference therefore makes a virtue of assuming nothing whatever about the psychological causes of our choice behavior.

  This doesn’t mean that economists believe that our choice behavior isn’t caused by what goes on in our heads. Adopting the theory of Revealed Preference doesn’t entail abandoning the principle that reason is the slave of the passions. Studies of brain-damaged people show that when our capacity for emotional response is impaired, we also lose our capacity to make coherent decisions (Damasio 1994). Nor is there any suggestion that we all make decisions in the same way. The theory of Revealed Preference accepts that some people are clever, and others are stupid; that some care only about money, and others just want to stay out of jail. Nor does the theory insist that people are selfish, as its critics mischievously maintain. It has no difficulty in modeling the kind of saintly folk who would sell the shirt off their back rather than see a baby cry.

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  Smart Economic Decision-Making in a Complex World

  • Morris Altman(Author)
  • 2020(Publication Date)
  • Academic Press

    (Publisher)

  In contrast with the conventional perspective on choice behaviour, a model of preference formation is developed of rational or intelligent utility maximizing agents wherein they can possess preferences that are objectively suboptimal from both an individual and social perspective. In other words, one should not assume consumer sovereignty as a given. In addition, the Revealed Preferences of agents might be optimal from the perspective of the individual agents, but might conflict with the preferences of other agents. With optimal but heterogeneous preferences, based on issues of gender or class, for example, moral and political dilemmas might arise with respect to resolving such optimal but conflicting preferences. Thus, the Revealed Preferences of agents cannot be deemed, necessarily, as an indicator of what is in the best interest of the agent and of society at large. For optimal preferences to be constructed and chosen requires an appropriate institutional setting. Moreover, the extent to which preferences are optimal affects the relative efficiency of the economy. Understanding how optimal preferences are constructed and realized is thus critically important from an analytical and from both an individual and social welfare perspective.

  Keywords

  Freedom of choice; Consumer sovereignty; Revealed Preferences; Sub-optimality; Institutional design; Decision-making environment; Externalities; Conflicting preferences

  Chapter outline

  • Introduction
  • An alternative model of preference formation
  • Conventional perspectives and critiques
  • Constructing an alternative theory of welfare maximization
  • Choice x-inefficiency and x-inefficiency in production
  • Conclusion
  • References

  Introduction

  It is important to model choice behaviour in a manner that captures the reality that choices made by individuals are often not utility maximizing or satisficing from the perspective of the person doing the choosing. If an individual’s choice behaviour is not welfare maximizing, as it is always assumed to be in the traditional economics narrative, then the Revealed Preferences of individuals need not be a metric for the good life. Rather, choice behaviour might instead reflect the preferences of others, misleading or incomplete information, or poor education. A key point made in this chapter is that only in an environment where individuals are free to choose and have effective voice, irrespective of income, gender, ethnicity, or religion, can choice behaviour be a metric for the good life. It is possible for rational agents who are characterized by optimal or true preferences to be unable to realize or manifest these preferences for social or institutional reasons. This has important implications for economic theory as well as for public policy, especially for institutional design. The perspective adopted in this chapter also explicitly takes the ethical and normative stance that one should respect the free choices of individuals and that free choice is an important component of the good life or socio-economic wellbeing (Sen, 2009 ). The narrative model builds on insights from Berlin (1968) , Harsanyi (1982) , Nussbaum (1999 , 2000) , and Sen (1990 , 1999 , 2000 , 2009) , amongst others, who argue that the manner in which preferences are formed and expressed is important for understanding the welfare implications of expressed preferences and the choices made by individuals. Insights of contemporary behavioural economics, which find that the manner in which choices are framed impact on the choices individuals make, need to be considered as well (Thaler & Sunstein, 2003 , 2008 ; Tversky & Kahneman, 1981

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