October 31, 2018
Revealed Referenced Preferences
Seyed Hassan Nosratabadi, UCLouvain CORE
The revealed preference theory, under the weak axiom of revealed preference (WARP), guarantees the existence of a preference relation. Preference relations are critical to economists as they predict the choice behavior of a decision maker as well as provi- ding a basis for welfare analysis. The revealed preference theory, however, induces a reference-independent framework to decision making, against which there is wide experimental evidence. In this paper I extract a reference-dependent choice behavior from the classical revealed preference theory that, while consistent with the data, pre- serves the predictive power of the classical theory to the extent possible and provides consistent welfare judgment. This is done via a decomposition of WARP which ena- bles me to minimally deviate from the classical theory. In particular, the resulting reference-dependent choice extends the fundamental theorem of revealed preferences to the case where the behavior is completely identified, in addition to choices over dou- bleltons (the unreferenced preference), via tripletons (referencedpreferences).