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Discovered Preferences for Risky and Non-Risky Goods

Author

Listed:
  • Sarah Jacobson

    (Williams College)

  • Jason Delaney

    (School of Business Administration, Georgia Gwinnett College)

  • Thorsten Moenig

    (Department of Mathematics, University of St. Thomas)

Abstract

We develop an axiomatic theory that integrates the discovered preference hypothesis into neoclassical microeconomic choice theory. A theory in which preferences must be discovered through experience can explain patterns observed in choice data, including preference reversals, evolution of or instability in risky choice, and errors that decline with repetition as seen in contingent valuation data. With reasonable assumptions, we show that preferences for common, high-ranked, and non-stochastic choice items are learned quickly and thus should appear stable. However, initially low-ranked choice items may remain persistently mis-ranked. Preferences for choice items with stochastic outcomes are difficult to learn, so choice under uncertainty is subject to error. At finite time, a choice item is more likely to be mis-ranked if it has stochastic outcomes, if it is initially low-ranked, or if it appears rarely in choice sets. The existence of a default option may or may not render correct ranking more difficult. Undiscovered preferences can lead to real welfare loss as agents make choices not congruent with their true preferences. This theory is amenable to tests using laboratory experiments. Preference discovery has implications for policy, and the process of discovery may contaminate choice data in a variety of contexts.

Suggested Citation

  • Sarah Jacobson & Jason Delaney & Thorsten Moenig, 2014. "Discovered Preferences for Risky and Non-Risky Goods," Department of Economics Working Papers 2014-02, Department of Economics, Williams College.
  • Handle: RePEc:wil:wileco:2014-02
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    Citations

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    Cited by:

    1. Somerville, Jason & McGowan, FĂ©idhlim, 2016. "Can chocolate cure blindness? Investigating the effect of preference strength and incentives on the incidence of Choice Blindness," Journal of Behavioral and Experimental Economics (formerly The Journal of Socio-Economics), Elsevier, vol. 61(C), pages 1-11.
    2. Marek Kapera, 2022. "Learning own preferences through consumption," KAE Working Papers 2022-074, Warsaw School of Economics, Collegium of Economic Analysis.
    3. Marek Kapera, 2024. "Learning, experimentation and the convergence of the discovered preferences," KAE Working Papers 2024-098, Warsaw School of Economics, Collegium of Economic Analysis.

    More about this item

    Keywords

    discovered preferences; preference stability; learning; risk preferences;
    All these keywords.

    JEL classification:

    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles

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