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Measuring Rationality with the Minimum Cost of Revealed Preference Violations

Author

Listed:
  • Mark Dean

    (Brown University)

  • Daniel Martin

    (Paris School of Economics)

Abstract

We introduce a new measure of how close a set of choices is to satisfying the observable implications of rationality and apply it to a large, balanced panel of household level consumption data. This new measure, the minimum cost index, is the minimum cost of breaking all revealed preference cycles found in choices from budget sets. Unlike existing measures of rationality, it responds to both the number and severity of revealed preference violations.

Suggested Citation

  • Mark Dean & Daniel Martin, 2016. "Measuring Rationality with the Minimum Cost of Revealed Preference Violations," The Review of Economics and Statistics, MIT Press, vol. 98(3), pages 524-534, July.
  • Handle: RePEc:tpr:restat:v:98:y:2016:i:3:p:524-534
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    File URL: http://www.mitpressjournals.org/doi/pdf/10.1162/REST_a_00542
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    Citations

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    Cited by:

    1. Victor Aguiar & Roberto Serrano, 2015. "Slutsky Matrix Norms and Revealed Preference Tests of Consumer Behaviour," Working Papers 2015-1, Brown University, Department of Economics.
    2. Elias Bouacida & Daniel Martin, 2017. "Predictive Power in Behavioral Welfare Economics," PSE Working Papers halshs-01489252, HAL.
    3. repec:eee:jetheo:v:172:y:2017:i:c:p:163-201 is not listed on IDEAS
    4. Shiozawa, Kohei, 2016. "Revealed preference test and shortest path problem; graph theoretic structure of the rationalizability test," Journal of Mathematical Economics, Elsevier, vol. 67(C), pages 38-48.
    5. Jan Heufer & Per Hjertstrand, 2015. "Homothetic Efficiency and Test Power: A Non-Parametric Approach," Tinbergen Institute Discussion Papers 15-064/I, Tinbergen Institute.
    6. Miguel Costa-Gomes & Carlos Cueva & Georgios Gerasimou & Matus Tejiscak, 2014. "Choice, Deferral and Consistency," Discussion Paper Series, Department of Economics 201416, Department of Economics, University of St. Andrews, revised 26 Dec 2016.
    7. Brocas, Isabelle & Carrillo, Juan D & Combs, T. Dalton & Kodaverdian, Niree, 2015. "Consistency in Simple vs. Complex Choices over the Life Cycle," CEPR Discussion Papers 10457, C.E.P.R. Discussion Papers.
    8. Kohei Shiozawa, 2015. "Note on goodness-of-fit measures for the revealed preference test: The computational complexity of the minimum cost index," Economics Bulletin, AccessEcon, vol. 35(4), pages 2455-2461.
    9. Drichoutis, Andreas C. & Nayga, Rodolfo, 2017. "Economic rationality under cognitive load," MPRA Paper 81111, University Library of Munich, Germany.
    10. Kircher, Philipp & Marzilli Ericson, Keith & Spinnewijn, Johannes & Starc, Amanda, 2015. "Inferring Risk Perceptions and Preferences using Choice from Insurance Menus: Theory and Evidence," CEPR Discussion Papers 10981, C.E.P.R. Discussion Papers.
    11. Jim Engle-Warnick & Natalia Mishagina, 2014. "Insensitivity to Prices in a Dictator Game," CIRANO Working Papers 2014s-19, CIRANO.
    12. Kohei Shiozawa, 2015. "Note on the goodness-of-fit measure for GARP; NP-hardness of minimum cost index," Discussion Papers in Economics and Business 15-18, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP).
    13. Costa-Gomes, Miguel & Cueva, Carlos & Gerasimou, Georgios, 2014. "Choice, Deferral and Consistency," SIRE Discussion Papers 2015-17, Scottish Institute for Research in Economics (SIRE).
    14. Pawel Dziewulski, 2018. "Just-noticeable difference as a behavioural foundation of the critical cost-efficiency," Economics Series Working Papers 848, University of Oxford, Department of Economics.
    15. Halevy, Yoram & Persitz, Dotan & Zrill, Lanny, 2012. "Parametric Recoverability of Preferences," Microeconomics.ca working papers yoram_halevy-2012-20, Vancouver School of Economics, revised 28 Aug 2015.
    16. COSAERT Sam, 2017. "What types are there?," LISER Working Paper Series 2017-01, LISER.
    17. Daniel M�ller, 2017. "The anatomy of distributional preferences with group identity," Working Papers 2017-02, Faculty of Economics and Statistics, University of Innsbruck, revised Mar 2017.
    18. Kohei Shiozawa, 2015. "Revealed Preference Test and Shortest Path Problem; Graph Theoretic Structure of the Rationalizability Test," Discussion Papers in Economics and Business 15-17-Rev.2, Osaka University, Graduate School of Economics and Osaka School of International Public Policy (OSIPP), revised Aug 2016.

    More about this item

    JEL classification:

    • D03 - Microeconomics - - General - - - Behavioral Microeconomics: Underlying Principles
    • D10 - Microeconomics - - Household Behavior - - - General
    • D12 - Microeconomics - - Household Behavior - - - Consumer Economics: Empirical Analysis
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques

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