Revealed Preference Theory Research Articles

The Specter of Revealed Preference Theory

My aim in this paper is to argue that the recent philosophical defenses of revealed preference theory do not withstand scrutiny. Towards this aim, I will first outline revealed preference theory. I will then briefly present the two most common arguments that the received view offers against it. Afterwards, I will outline three argumentative strategies for rehabilitating revealed preference theory, and successively rebut each of them.

The emergence of economic rationality of GPT.

As large language models (LLMs) like GPT become increasingly prevalent, it is essential that we assess their capabilities beyond language processing. This paper examines the economic rationality of GPT by instructing it to make budgetary decisions in four domains: risk, time, social, and food preferences. We measure economic rationality by assessing the consistency of GPT's decisions with utility maximization in classic revealed preference theory. We find that GPT's decisions are largely rational in each domain and demonstrate higher rationality score than those of human subjects in a parallel experiment and in the literature. Moreover, the estimated preference parameters of GPT are slightly different from human subjects and exhibit a lower degree of heterogeneity. We also find that the rationality scores are robust to the degree of randomness and demographic settings such as age and gender but are sensitive to contexts based on the language frames of the choice situations. These results suggest the potential of LLMs to make good decisions and the need to further understand their capabilities, limitations, and underlying mechanisms.

The Choquet integral supported by a hedonic approach for modelling preferences in hotel selection

This paper presents a methodology for modelling the hotel selection process by combining the hedonic pricing method and the Choquet integral, a multi-criteria decision-making approach. The hedonic pricing method is a valuable tool in revealed preference theory, enabling the acquisition of preferential information in a straightforward manner. In this study, we use hedonic pricing to identify the significant criteria that influence the tourism selection process and to evaluate their importance. We combine the hedonic methodology with the Choquet integral to consider not only the importance of each criterion but also the importance of each subset of criteria. This proposed hybrid technique – the Choquet integral supported by the hedonic price method – offers an effective methodology for hotel selection by taking into account the market valuation of the criteria. We apply this methodology to a database of Spanish hotels and demonstrate the validity of our proposal in introducing valuable preferential information into the hotel classification process. This approach holds potential benefits for both tourism companies and travellers.

Integrated preference argumentation and applications in consumer behaviour analyses

Consumer preference studies in economics rest heavily on the behavioural interpretation of preference especially in the form of Revealed Preference Theory (RPT). Viewing purchasing decisions as a kind of human reasoning, in this paper we are interested in generalising behaviourism to preference-based argumentation where existing frameworks are arguably governed by the opposing mentalistic interpretation of preference. Concretely our contributions are three-fold. First we re-construct and unify two main approaches to RPT in argumentation terms by developing a Revealed Preference Argumentation (RPA) framework. We show that key RPT-based consumer analyses such as different rationality checks of a consumer behaviour and various kinds of such behaviour's extrapolations can be translated to computational tasks in RPA. RPA is in turn subsumed by the second contribution - an Integrated Preference Argumentation (IPA) framework which fully integrates mentalism and behaviourism. In particular we show that RPA is just a special case of IPA with only revealed preference, while existing preference-based argumentation frameworks can be viewed as IPA frameworks with only stated preference. As the third contribution, we develop a complete set of IPA algorithms and establish their correctness and termination for a general class of IPA frameworks. For demonstration we implement the algorithms in Prolog to obtain an IPA reasoning engine and test the engine with various RPT-based consumer behaviour analyses. In sum, it is argued that the current paper provides not only a theory of Integrated Preference Argumentation, but also a related development tool for future applications of argumentation to behavioural economics - a largely unexplored area so far though Dung used the stable marriage problem in microeconomic game theory to partly motivate the argumentation theory.

Subjective total comparative evaluations

AbstractIn Preference, Value, Choice, and Welfare, I argued, among other things, that preferences in economics are and ought to be total subjective comparative evaluations, that the theory of rational choice is a reformulation of everyday folk-psychological explanations and predictions of behaviour, and that revealed preference theory is completely untenable. All three of these theses have been challenged in essays by Erik Angner (2018), Francesco Guala (2019) and Johanna Thoma (2021a, 2021b). This essay responds to these criticisms and defends these three theses.

Impressionable Rational Choice: Revealed-Preference Theory with Framing Effects

Revealed preference is one of the most influential ideas in economics. It is, however, not clear how it can be generally applied in cases where agents’ choices depend on arbitrary changes in the decision environment. In this paper, we propose a generalization of the classic rational choice theory that allows for such framing effects. Frames are modeled as different presentations (e.g., visual or conceptual) of the alternatives that may affect choice. Our main premise is that framing effects are neutral (i.e., independent of labeling the alternatives). An agent exhibiting these neutral framing effects who is otherwise rational, is called impressionable rational. We show that our theory encompasses many familiar behavioral models such as status-quo bias, satisficing, present bias, framing effects resulting from indecisiveness, certain forms of limited attention, categorization bias, and the salience theory of choice, as well as hybrid models. Moreover, in all these models, sufficiently rich choice data allow our theory to identify the “correct” underlying preferences without invoking each specific cognitive process. Additionally, we introduce a falsifiable axiom that completely characterizes the behavior of agents who are impressionable rational.

Filtered Belief Revision: Syntax and Semantics

In an earlier paper [Rational choice and AGM belief revision, Artificial Intelligence, 2009] a correspondence was established between the set-theoretic structures of revealed-preference theory (developed in economics) and the syntactic belief revision functions of the AGM theory (developed in philosophy and computer science). In this paper we extend the re-interpretation of those structures in terms of one-shot belief revision by relating them to the trichotomous attitude towards information studied in Garapa (Rev Symb Logic, 1–21, 2020) where information may be either (1) fully accepted or (2) rejected or (3) taken seriously but not fully accepted. We begin by introducing the syntactic notion of filtered belief revision and providing a characterization of it in terms of a mixture of both AGM revision and contraction. We then establish a correspondence between the proposed notion of filtered belief revision and the above-mentioned set-theoretic structures, interpreted as semantic partial belief revision structures. We also provide an interpretation of the trichotomous attitude towards information in terms of the degree of implausibility of the information.

A semantic approach to nonmonotonic reasoning: Inference operations and choice

AbstractThis paper presents a uniform semantic treatment of nonmonotonic inference operations that allow for inferences frominfinitesets of premisses. The semantics is formulated in terms ofselection functionsand is a generalisation of thepreferential semanticsof Shoham, Kraus et al., and Makinson. A selection function picks out from a given set of possible states (worlds, situations, models) a subset consisting of those states that are, in some sense, the most preferred ones. A proposition is anonmonotonic consequenceof a set of propositions iff holds in all the most preferred ‐states. In the literature on revealed preference theory, there are a number of well‐known theorems concerning the representability of selection functions, satisfying certain properties, in terms of underlying preference relations. Such theorems are utilised here to give corresponding representation theorems for nonmonotonic inference operations. At the end of the paper, the connection between nonmonotonic inference and belief revision, in the sense of Alchourrón, Gärdenfors, and Makinson, is explored. In this connection,infinitary belief revision operations,that allow for the revision of a theory with a possibly infinite set of propositions, are introduced and characterised axiomatically. Several semantic representation theorems are proved for operations of this kind.

Weakness of will. The limitations of revealed preference theory

Abstract The phenomenon of weakness of will – not doing what we perceive as the best action – is not recognized by neoclassical economics due to the axiomatic assumptions of the revealed preference theory (RPT) that people do what is best for them. However, present bias shows that people have different preferences over time. As they cannot be compared by the utility measurements, economists need to normatively decide between selves (short- versus long-term preferences). A problem is that neoclassical economists perceive RPT as value-free and incorporate present bias within the economic framework. The axiomatic assumption that people do what is best for them leads to theoretical and practical dilemmas. This work examines weakness of will to resolve some shortcomings of RPT. The concept of intention is used to provide multiple self conception with the framework to decide between selves, which had not been done before. The paper concludes that individuals should not always follow their revealed preferences (desires) but the intentions (reason) because the latter indicates what people really want.

How revealed preference theory can be explanatory

The question of how to frame agential preferences in economics finds one caught between Scylla and Charybdis. If preferences are framed in as minimal and deflationary a manner as revealed preference theory recommends, the theory falls prey to objections about its predictiveness and explanatory power. Alternatively, if too many cognitive and causal intricacies are incorporated into the preference concept, revealed preference models will violate pragmatic norms of model construction, surrendering model simplicity and generality. This paper charts a middle course, arguing that the path to salvation lies through an understanding of revealed preference models as program explanations.

Summarized distributions of mass: a statistical approach to consumers’ consumption spaces

This paper focuses on logical aspects of choices being made by the consumer under conditions of uncertainty or certainty. Such logical aspects are found out to be the same. Choices being made by the consumer that should maximize her subjective utility are decisions studied by revealed preference theory. A finite number of possible alternatives is considered. They are mutually exclusive propositions identifying all quantitative states of nature of a consumption plan. Each proposition of it is expressed by a real number. This research work distinguishes it from its temporary truth value depending on the state of information and knowledge of the consumer. Since each point of the consumption space of the consumer belongs to a two-dimensional convex set, this article focuses on conjoint distributions of mass. Indeed, the consumption space of the consumer is generated by all coherent summaries of a conjoint distribution of mass. Each point of her consumption space is connected with a weighted average of states of nature of two consumption plans jointly studied. They give rise to a conjoint distribution of mass. The consumer chooses a point of a two-dimensional convex set representing that bundle of goods actually demanded by her inside of her consumption space. This paper innovatively shows that it is nothing but a bilinear and disaggregate measure. It is decomposed into two real numbers, where each real number is a linear measure. In this paper, different measures are obtained. They can be disaggregate or aggregate measures, where the latter are independent of the notion of ordered pair of consumption plans.

Reward-specific satiety affects subjective value signals in orbitofrontal cortex during multicomponent economic choice

Sensitivity to satiety constitutes a basic requirement for neuronal coding of subjective reward value. Satiety from natural ongoing consumption affects reward functions in learning and approach behavior. More specifically, satiety reduces the subjective economic value of individual rewards during choice between options that typically contain multiple reward components. The unconfounded assessment of economic reward value requires tests at choice indifference between two options, which is difficult to achieve with sated rewards. By conceptualizing choices between options with multiple reward components ("bundles"), Revealed Preference Theory may offer a solution. Despite satiety, choices against an unaltered reference bundle may remain indifferent when the reduced value of a sated bundle reward is compensated by larger amounts of an unsated reward of the same bundle, and then the value loss of the sated reward is indicated by the amount of the added unsated reward. Here, we show psychophysically titrated choice indifference in monkeys between bundles of differently sated rewards. Neuronal chosen value signals in the orbitofrontal cortex (OFC) followed closely the subjective value change within recording periods of individual neurons. A neuronal classifier distinguishing the bundles and predicting choice substantiated the subjective value change. The choice between conventional single rewards confirmed the neuronal changes seen with two-reward bundles. Thus, reward-specific satiety reduces subjective reward value signals in OFC. With satiety being an important factor of subjective reward value, these results extend the notion of subjective economic reward value coding in OFC neurons.

Stability and Median Rationalizability for Aggregate Matchings

We develop the theory of stability for aggregate matchings used in empirical studies and establish fundamental properties of stable matchings including the result that the set of stable matchings is a non-empty, complete, and distributive lattice. Aggregate matchings are relevant as matching data in revealed preference theory. We present a result on rationalizing a matching data as the median stable matching.

What are the US Spectrum Auctions for 5G Teaching Us About Auction Efficiency?

This paper seeks to assess the efficiency of the first 5G spectrum auctions held in the United States. In 2018 and 2019, the Federal Communications Commission (FCC) administered auctions 101 and 102 to assign spectrum in the 28 GHz and 24 GHz bands, respectively. Auction 101 sold spectrum on the 28 GHz band for Upper Microwave Flexible Use Service licenses and raised a total of about $700 million. Auction 102 assigned spectrum on the 24 GHz band for Upper Microwave Flexible Use Services. It raised a total of close to $2 billion. In July 2020, the FCC auctioned the 3.5 GHz band for Priority Access Licensees, raising over $4 billion. I implement an assessment of the efficiency of an auction based on its observed bidding data during the clock rounds of the auctions, while relying on revealed preference theory. Data are available at the FCC’s Auctions website. Bidding data are organised by geographical area and for each geographical area, demand point sets for each round, for each bidder. I rely on the application of the well-known Generalised Axiom of Revealed Preference or GARP, and less well-known Homothetic Axiom of Revealed Preference or HARP, to construct two indexes, Afriat Efficiency Index (AEI) and Homothetic Efficiency Index (HEI) to calculate measurements of rational bidding associated with each bidder. The US relied on an auction format, which uses demand revelation but allows the bidders to state the price at which they would demand a number of units of the same item (that is, blocks or licenses). In essence, the auction format for auctions 102 and 105 followed a multiple round format with an ascending clock not entirely driven by the auctioneer, whereby a bid is best described as a stepwise (ascending or descending) demand function revealed on the price range set by the auctioneer for the round. The difficulty in dealing with the data is that the bidding language of these auctions allows a bidder to express its demand for the items being sold in a service area by means of a stepwise function (either ascending or descending). The challenge at this stage is to suitably adapt the data to the usual data set format assumed by GARP or HARP. Using an efficiency approach, I assess each auction at two levels: assessment of efficiency through utility maximisation via AEI and an assessment of efficiency through homotheticity via HEI. Auctioneers, in particular, and spectrum authorities, in general, are concerned with the economic aspects of their spectrum assignment processes. The most important issue that pertains the results of the auction is the answer to the question, was the spectrum assigned to those bidders who can make the best use of it? Answering the question puts us on the grounds of auction efficiency. Devising methods to use the auction bidding data to answer such question has been a long-standing question. GARP and HARP are two revealed preference approaches that do not require us to adopt a parametrized utility function to represent bidder’s preferences. Those methods use the observed data and define a rigorous consistency test on the data.

The revealed preference theory of stable matchings with one-sided preferences

We investigate the testable implications of the theory of stable matchings in two-sided matching markets with one-sided preferences. Our main result connects the revealed preference analysis to the well-known lattice structure of the set of stable matchings, and tests the rationalizability of a data set by analyzing the joins and meets of matchings.

Verbal aptitude hurts children's economic decision‐making accuracy

AbstractThe impact of children's decision making increases with age and has relatively increased through time. Although a lot is known about cognitive development, less is known about how this development impacts decision accuracy in economic situations. This study builds on revealed preference theory to study the impact of cognitive aptitude on economic decision‐making accuracy and explores the intervening role of decision heuristics. In a study (n = 100) where children from three age groups had to make choices between combinations of products, we found that decision accuracy was lower for kindergarteners than for children from the third and sixth grade, replicating and validating older findings. We found that one aspect of cognitive aptitude, namely, verbal aptitude, hurts rather than helps decision accuracy. Further explorations suggested that this relation was due to the decreased use of the “more is better” heuristic, a child's preference for options with many units, which decreased with increasing verbal aptitude but increased rational decision making. We discuss the implications of the negative effect of verbal aptitude on economic decision‐making accuracy.

Reduced Neuronal Value Signals in Monkey Orbitofrontal Cortex during Relative Reward-Specific Satiety of Two-Component Choice Options

Sensitivity to satiety constitutes a necessary requirement for claiming neuronal coding of subjective reward value. In the most natural and interpretable way, specific satiety arises from on-going consumption of individual rewards. Choices between differently sated rewards reveal specific value reductions. However, animals often fail to choose a sated reward over a less sated reward, which precludes precise satiety assessment at choice indifference between single rewards. Choice options with two distinct rewards ('bundles') offer a solution. We used the framework of Revealed Preference Theory that defines the subjective value of composite bundles and studied reward-specific satiety during on-going reward consumption. Monkeys chose between two bundles that each contained one less and one more sated reward with independently set quantity. Despite advancing satiety, the animals kept choosing both bundles and attained choice indifference with psychophysically controlled reward titration. The reward quantities required for choice indifference suggested differential, reward-specific subjective value reduction. Conventional measurement of licking demonstrated mechanistic independence of subjective value change. Neuronal chosen value signals in orbitofrontal cortex (OFC) followed closely the choice pattern of subjective value change within recording periods of individual neurons. A neuronal classifier distinguishing the bundles and predicting choice substantiated the subjective value change. Conventional choice between single rewards confirmed the neuronal response change seen with two-reward bundles. These results demonstrate a neuronal substrate for satiety-induced subjective value change as necessary requirement for subjective value coding in OFC.

Concrete Ontology: Comments on Lauer, Little, and Lohse

I share with all the other authors the view that conceptual metaphysics without close ties to science is of minimal value, that this holds for much of current work on social ontology, and that if there is value in social ontology, it has to be in contributing to empirical social science. I do perhaps disagree with all three authors about making any blanket statements concerning either instrumentalism or realism about the social sciences and their ontologies. I argue and try to show instead that if there are fruitful questions of social ontology, they are probably mostly local empirical issues raised by specific pieces of social science. Certain kinds of pluralism and instrumentalism may well make sense in some situations. I illustrate with debates over the need for psychological realism and revealed preference theory in economics.

In defence of revealed preference theory

AbstractThis paper defends revealed preference theory against a pervasive line of criticism, according to which revealed preference methodology relies on appealing to some mental states, in particular an agent’s beliefs, rendering the project incoherent or unmotivated. I argue that all that is established by these arguments is that revealed preference theorists must accept a limited mentalism in their account of the options an agent should be modelled as choosing between. This is consistent both with an essentially behavioural interpretation of preference and with standard revealed preference methodology. And it does not undermine the core motivations of revealed preference theory.

Revealed preference in online reviews: Purchase verification in the tablet market

The review systems of online platforms create a stream of online word-of-mouth that allows consumers to learn from others' purchasing experience. However, it is difficult for consumers to discern the authenticity of a review or the reviewer's level of experience with the product. Platforms can aid the authentication process by incorporating a verified purchase (VP) indication, or “badge” as is done on Amazon, in reviews where the consumer writing the review has verifiably purchased the focal product. A VP is a revealed preference for a product implying a utility-maximizing choice where the consumer writing the review has experience with the product. Combining an Amazon dataset on tablet computers with the theory of revealed preference in online reviews, we uncover a surprising new result: the proportion of VP reviews (a revealed preference) is associated with higher future sales, and the effect of the proportion of VP reviews on sales dominates the effect of the mean rating. This novel use of VP with revealed preference theory has implications for new research in the design of recommendation systems, detecting fraudulent reviews, and online profiling/privacy. Moreover, the use of a VP badge is immediately applicable to firms and platforms.