Revealed Preference

Published Oct 26, 2023

Definition of Revealed Preference

Revealed preference refers to a theory in economics that suggests that individuals reveal their preferences based on their actual choices and behavior. According to this theory, a person’s preferences can be determined by observing the choices they make in various situations and contexts. It assumes that individuals are rational and consistent decision-makers.

Example

To understand revealed preference, let’s consider a hypothetical scenario. Suppose there are two restaurants, Restaurant A and Restaurant B, and an individual named Sarah has the option to choose between the two for a dinner date. Sarah chooses Restaurant A. Based on this choice, we can infer that Sarah prefers Restaurant A over Restaurant B.

Now, let’s say Sarah has another opportunity to choose between Restaurant A and a new Restaurant C. This time, she chooses Restaurant C. Based on her choice, we can infer that Sarah prefers Restaurant C over Restaurant A.

By observing Sarah’s choices in these situations, we can understand and infer her revealed preferences. In this example, it is revealed that Sarah prefers Restaurant A over Restaurant B and Restaurant C over Restaurant A.

Why Revealed Preference Matters

Revealed preference is significant in economics as it helps in understanding individual preferences and decision-making processes. By analyzing the choices people make in real-life situations, economists can infer their underlying preferences and use this information to study consumer behavior and market dynamics. Revealed preference theory also helps in predicting and understanding the demand for different goods and services in the market, which is crucial for businesses and policymakers.