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Parametric Recoverability of Preferences

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  • Halevy, Yoram
  • Persitz, Dotan
  • Zrill, Lanny

Abstract

Revealed preference theory is brought to bear on the problem of recovering approximate parametric preferences from consistent and inconsistent consumer choices. We propose measures of the incompatibility between the revealed preference ranking implied by choices and the ranking induced by the considered parametric preferences. These incompatibility measures are proven to characterize well-known inconsistency indices. We advocate a recovery approach that is based on such incompatibility measures, and demonstrate its applicability for misspecification measurement and model selection. Using an innovative experimental design we empirically substantiate that the proposed revealed-preference-based method predicts choices significantly better than a standard distance-based method.

Suggested Citation

  • Halevy, Yoram & Persitz, Dotan & Zrill, Lanny, 2016. "Parametric Recoverability of Preferences," Microeconomics.ca working papers yoram_halevy-2016-11, Vancouver School of Economics, revised 02 Nov 2016.
  • Handle: RePEc:ubc:pmicro:yoram_halevy-2016-11
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    More about this item

    Keywords

    Revealed Preference; Recoverability; Identification; Non-COnvex Preferences; Pairwise Choice; First-Order Risk Aversion; Portfolio Choice; Laboaratory;

    JEL classification:

    • C00 - Mathematical and Quantitative Methods - - General - - - General
    • C18 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Methodolical Issues: General
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D00 - Microeconomics - - General - - - General
    • D11 - Microeconomics - - Household Behavior - - - Consumer Economics: Theory
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions

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