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How are Preferences Revealed?

Author

Listed:
  • 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.

Suggested Citation

  • John Beshears & James Choi & David Laibson & Brigitte Madrian, 2008. "How are Preferences Revealed?," Yale School of Management Working Papers amz2466, Yale School of Management.
    • Handle: RePEc:ysm:wpaper:amz2466
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    File URL: https://repec.som.yale.edu/icfpub/publications/2466.pdf
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    More about this item

    Keywords

    preferences; normative preferences; revealed preferences; consumer behavior Working Paper Series;
    All these keywords.

    JEL classification:

    • A11 - General Economics and Teaching - - General Economics - - - Role of Economics; Role of Economists
    • B4 - Schools of Economic Thought and Methodology - - Economic Methodology
    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D60 - Microeconomics - - Welfare Economics - - - General
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • H1 - Public Economics - - Structure and Scope of Government

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