How Are Preferences Revealed?
Abstract (John Beshears, Choi, Laibson, Madrian)
It sometimes makes sense to assume that revealed preferences (preferences that rationalize an economic agent’s observed actions) and normative preferences (preferences that represent an economic agent’s actual interests) are identical. But there are many cases where this assumption is violated. We first 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 relies on 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.