Revealed preference: Difference between revisions
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The ''strong axiom of revealed preference'' (SARP) is an expansion of the concept of the weak axiom. A choice behavior that satisfies the weak axiom can form circles. That is if A is preferred to B and B to C then under the weak axiom it is possible that C is preferred to A. The strong axiom makes this behavior impossible, as it is the same as weak axiom plus the requirement that circles are not possible. (In two dimensions WARP=SARP). |
The ''strong axiom of revealed preference'' (SARP) is an expansion of the concept of the weak axiom. A choice behavior that satisfies the weak axiom can form circles. That is if A is preferred to B and B to C then under the weak axiom it is possible that C is preferred to A. The strong axiom makes this behavior impossible, as it is the same as weak axiom plus the requirement that circles are not possible. (In two dimensions WARP=SARP). |
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==Criticism== |
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Stanley Wong <ref>Stanley Wong, ''Foundations of Paul Samuelson's Revealed Preference Theory: A Study by the Method of Rational Reconstruction'', Routledge (1978)</ref> argues that revealed preference theory is a failed research program. According to Wong, Samuelson's 1938 presented revealed preference theory as an alternative theory to utility theory, while in 1950, Samuelson took the demonstrated equivalence of the two theories as a vindication for his position, rather than as a refutation. |
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If there exist only an apple and an orange, and an orange is picked, then one can definitely say that an orange is revealed preferred to an apple. In the real world, when it is observed that a consumer purchased an orange, it is impossible to say what good or set of goods or behavioral options were discarded in preference of purchasing an orange. In this sense, preference is not revealed at all in the sense of ordinal utility. [http://google.com/search?q=cache:ZcpHpBME3sEJ:www.societies.cam.ac.uk/cujif/ABSTRACT/980606.htm+%22revealed+preference%22+%22not+observable%22&hl=en&ct=clnk&cd=3&gl=uk&lr=lang_en|lang_ja&client=firefox-a][http://elsa.berkeley.edu/~botond/mistakeschicago.pdf][http://findarticles.com/p/articles/mi_qa5437/is_200412/ai_n21361433/pg_8]{{Dead link|date=October 2009}} One of the critics of the revealed preference theory states that "Instead of replacing 'metaphysical' terms such as 'desire' and 'purpose'" they "used it to legitimize them by giving them operational definitions." Thus in psychology, as in economics, the initial, quite radical operationalist ideas eventually came to serve as little more than a "reassurance fetish" (Koch 1992, 275) for mainstream methodological practice." [http://www.redorbit.com/news/science/112364/on_operationalisms_and_economics/] |
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==See also== |
==See also== |
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Revision as of 21:48, 4 May 2011
Revealed preference theory, pioneered by American economist Paul Samuelson, is a method by which it is possible to discern the best possible option on the basis of consumer behavior. Essentially, this means that the preferences of consumers can be revealed by their purchasing habits. Revealed preference theory came about because the theories of consumer demand were based on a diminishing marginal rate of substitution (MRS). This diminishing MRS is based on the assumption that consumers make consumption decisions based on their intent to maximize their utility. While utility maximization was not a controversial assumption, the underlying utility functions could not be measured with great certainty. Revealed preference theory was a means to reconcile demand theory by creating a means to define utility functions by observing behavior.
Theory
If a person chooses a certain bundle of goods (ex. 2 apples, 3 bananas) while another bundle of goods is affordable (ex. 3 apples, 2 bananas), then we say that the first bundle is revealed preferred to the second. It is then assumed that the first bundle of goods is always preferred to the second. This means that if the consumer ever purchases the second bundle of goods then it is assumed that the first bundle is unaffordable. This implies that preferences are transitive. In other words if we have bundles A, B, C, ...., Z, and A is revealed preferred to B which is revealed preferred to C and so on then it is concluded that A is revealed preferred to C through Z. With this theory economists can chart indifference curves which adhere to already developed models of consumer theory.
The weak axiom of revealed preference
The weak axiom of revealed preference (WARP) is a characteristic on the choice behavior of an economic agent. For example, if an individual chooses A out of a set of options including B, they should never choose B when faced with a choice of a different set of options which also includes A and B. More formally, if A is ever chosen when B is available, then there can be no set containing both alternatives from which B is chosen and A is not. These two definitions however do not state the same necessary restrictions to satisfy WARP. The former prohibits ever choosing B after A was once chosen over B. The latter (and weaker rectriction) only requires to choose A as well, if B were to be chosen out of several choices.
This characteristic can be stated as a characteristic of Walrasian demand functions as seen in the following example. Let pa be the price of apples and pb be the price of bananas, and let the amount of money available be m=5. If pa =1 and pb=1, and if the bundle (2,3) is chosen, it is said that that the bundle (2,3) is revealed preferred to (3,2), as the latter bundle could have been chosen as well at the given prices. More formally, assume a consumer has a demand function x such that they choose bundles x(p,w) and x(p',w') when faced with price-wealth situations (p,w) and (p',w') respectively. If p·x(p',w') ≤ w then the consumer chooses x(p,w) even when x(p',w') was available under prices p at wealth w, so x(p,w) must be preferred to x(p',w').
The strong axiom of revealed preference
The strong axiom of revealed preference (SARP) is an expansion of the concept of the weak axiom. A choice behavior that satisfies the weak axiom can form circles. That is if A is preferred to B and B to C then under the weak axiom it is possible that C is preferred to A. The strong axiom makes this behavior impossible, as it is the same as weak axiom plus the requirement that circles are not possible. (In two dimensions WARP=SARP).
See also
- Conjoint analysis
- Hedonic regression
- Travel cost analysis
- Contingent valuation or stated preference methods
References
- Nicholson, W. (2005) Microeconomics, Thomson, Southwestern.
- Mas-Colell, A.; Whinston, M.D.; Green, J.R. (1995) "Microeconomic Theory", First Edition, New York: Oxford University Press, New York
- Samuelson, P. (1938). A Note on the Pure Theory of Consumers' Behaviour. Economica 5:61-71.
- Varian, H. (1992) Microeconomic Analysis, Third edition, New York: Norton, Section 8.7
External links
- Revealed Preference, review by Hal R. Varian, 2005, prepared for Samuelsonian Economics and the 21st Century.
- Lecture Notes in Microeconomic Theory, book by Ariel Rubinstein, 2005.