A Theory of Preference Discovery

"Is the assumption that people automatically know their own preferences innocuous? We present a theory that explores the implications of having to discover one's preferences. We show that if tastes must be learned through experience, preferences for some goods will be learned over time, but preferences for other goods will never be learned. This is because sampling a new item has an opportunity cost. Learning is less likely for people who are impatient, risk averse, low income, or short-lived, and for consumption items that are rare, are expensive, must be bought in large quantities, or are initially judged negatively relative to other items. Choices will eventually stabilize, but they need not stabilize at true preferences. A pessimistic bias about untried goods should increase with time. Agents will make choice reversals during the learning process. Welfare loss from suboptimal choices will decline over time but need not approach zero. Overall, our results imply that undiscovered preferences could confound interpretation of choice data of all kinds and could have significant welfare and policy implications."