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Dynamic and Stochastic Rational Behavior

Author

Listed:
  • Nail Kashaev
  • Victor H. Aguiar
  • Martin Pl'avala
  • Charles Gauthier

Abstract

The (static) utility maximization model of Afriat (1967), which is the standard in analysing choice behavior, is under scrutiny. We propose the Dynamic Random Utility Model (DRUM) that is more flexible than the framework of Afriat (1967) and more informative than the static Random Utility Model (RUM) framework of McFadden and Richter (1990). Under DRUM, each decision-maker randomly draws a utility function in each period and maximizes it subject to a menu. DRUM allows for unrestricted time correlation and cross-section heterogeneity in preferences. We characterize DRUM for situations when panel data on choices and menus are available. DRUM is linked to a finite mixture of deterministic behaviors that can be represented as a product of static rationalizable behaviors. This link allows us to convert the characterizations of the static RUM to its dynamic form. In an application, we find that although the static utility maximization model fails to explain population behavior, DRUM can explain it.

Suggested Citation

  • Nail Kashaev & Victor H. Aguiar & Martin Pl'avala & Charles Gauthier, 2023. "Dynamic and Stochastic Rational Behavior," Papers 2302.04417, arXiv.org, revised Aug 2023.
    • Handle: RePEc:arx:papers:2302.04417
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    References listed on IDEAS

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    1. Matias D. Cattaneo & Xinwei Ma & Yusufcan Masatlioglu & Elchin Suleymanov, 2020. "A Random Attention Model," Journal of Political Economy, University of Chicago Press, vol. 128(7), pages 2796-2836.
    2. Aguiar, Victor H. & Serrano, Roberto, 2021. "Cardinal revealed preference: Disentangling transitivity and consistent binary choice," Journal of Mathematical Economics, Elsevier, vol. 94(C).
    3. Guiso, Luigi & Sapienza, Paola & Zingales, Luigi, 2018. "Time varying risk aversion," Journal of Financial Economics, Elsevier, vol. 128(3), pages 403-421.
    4. Douglas M. Gale & Shachar Kariv & Syngjoo Choi & Raymond Fisman, 2007. "Revealing Preferences Graphically: An Old Method Gets a New Tool Kit," American Economic Review, American Economic Association, vol. 97(2), pages 153-158, May.
    5. Abi Adams & Richard Blundell & Martin Browning & Ian Crawford, 2015. "Prices versus preferences: taste change and revealed preference," IFS Working Papers W15/11, Institute for Fiscal Studies.
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