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How are Preferences Revealed?

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  • John Beshears
  • James Choi
  • David Laibson
  • Brigitte Madrian

Abstract

Revealed preferences are tastes that rationalize an economic agent's observed actions. Normative preferences represent the agent's actual interests. It sometimes makes sense to assume that revealed preferences are identical to normative preferences. But there are many cases where this assumption is violated. We identify five factors that increase the likelihood of a disparity between revealed preferences and normative preferences: passive choice, complexity, limited personal experience, third-party marketing, and intertemporal choice. We then discuss six approaches that jointly contribute to the identification of normative preferences: structural estimation, active decisions, asymptotic choice, aggregated revealed preferences, reported preferences, and informed preferences. Each of these approaches uses consumer behavior to infer some property of normative preferences without equating revealed and normative preferences. We illustrate these issues with evidence from savings and investment outcomes.

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Bibliographic Info

Paper provided by Yale School of Management in its series Yale School of Management Working Papers with number amz2466.

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Date of creation: 01 Apr 2008
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Handle: RePEc:ysm:somwrk:amz2466

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Keywords: preferences; normative preferences; revealed preferences; consumer behavior Working Paper Series;

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As found by EconAcademics.org, the blog aggregator for Economics research:
  1. How Are Preferences Revealed?
    by Miguel in Simoleon Sense on 2010-09-14 22:12:38
  2. Rationality and Economics - Lecture 2
    by Liam Delaney in Geary Behaviour Centre on 2010-09-14 12:18:00
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