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Revealed Preference Theory, Answering the Economics
Question
FRANKLIN CHIEMEKA AGUKWE
Finance Section Skymax Integrated Networks Limited
Email: emidollar39@gmail.com,
Tel:+2348086506570
Abstract
Oskar Morgenstern (1972) in his article “Thirteen critical points in contemporary economics. An
Interpretation” pointed out a problem in Revealed preference theory. He wanted to find out the true nature
of choice. In his article he tried to know whether consumer‟s choice actually reveals their preference. Thus
in this review article we try to proffer solution to this question. The question goes in this form „‟ Does
choice truly reveal consumer preference when the consumer is able to afford all of the available options?
For example, if a consumer is confronted with three goods and can afford to purchase all three (A, B, and
C) and he choose to first purchase A, then C, and then B - does this suggest that the consumer preference
for the goods is A > C > B? The debate rests on the fact that since the consumer can afford all three goods
and does not need to make a preferential decision, does the order of consumption reflect any preference?
This paper solves this problem by proving that choice is determined by Present Moment Factors that is
composed of factors mentioned in the study and preference is revealed or determined by utility.
Key Words: Present Moment Factors, Physical evidence of utility, Null choice hypothesis, Alternative
choice hypothesis.
Introduction
Professor Samuelson Paul’s theory of demand is based on the revealed preference axiom or hypothesis
which states that choice reveals preference. Keeping this fact into view, a consumer buys a combination of
two goods either because he likes this combination in relation to others or this is cheaper than others.
Suppose the consumer buys combination A rather than combinations B, C or D. it means that he reveals his
preference for two reasons. First, combination A may be cheaper than other combinations B, C and D.
Second, combination A may be dearer than others and even then he likes it more than other combinations.
In such a situation, it can be said that A is revealed preferred to B, C, D or B, C, D are revealed inferior to
A. (Jhingan 2009 p182). According to professor Hicks when a consumer reveals his preference for a
definite combination on the basis of observed market behavior, he does so under strong ordering when the
chosen position is shown to be preferred to all other positions within a consumer’s price income line. So
when the consumer reveals his definite preference for combination A, within and on the price income line
(consumer’s affordability boundary), he rejects all the other combinations such as B, C and D. Thus the
choice of A is strongly ordered. We very well agree with professor Samuelson and Hicks on these views
but we do not agree that their views should be the concluding view on deciding the true nature choice. This
is because there are many factors which they did not consider and thus this paper intends to bring into focus
those factors. To proffer solution to this question we thus start by rejecting some unrealistic assumptions of
Professor Samuelson which are:

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1. Consumer’s tastes do not change.
2. Consumer’s choice is based on strong ordering
3. It assumes consistency of consumer behavior.
We understand the need for such assumptions but in the quest to reveal the true state of choice we cannot
depend on these assumptions. This is because they are actually not practicable in real life and their
inconsistencies and changes may or may not contribute to determine choice and preference. We first look at
the assumption of consistency of consumer behavior. This assumption should not be considered but
discarded because human behavior is not consistent. Human behavior at times is uncertain so also are his
rationales for choice. Some choices are made in error i.e. they are not guided by evidence of utility but
other factors which shall be looked into. For the purpose of our analysis we take food as our illustrative
guide a consumer who intends to consume three kinds of food is confronted with the following foods which
he intends to eat. We represent the foods as (A)(B) and (C).(A) Is Lobster, (B) is Chicken and (C) is
Pizzas’. We assume that all give the same level of utility. A consumer who intends to eat all three foods
may decide to start consuming any of the foods therefore the fact that he starts consuming (A) Lobster does
not mean he prefers Lobster to (B) chicken. It only means that since he must consume one food at a time
among the three foods he can choose to start with any of the foods, either (B) Chicken or (A) Lobster or (C)
Pizzas. This thus does not indicate his preference of any of the foods to the others. This point was noted by
Morgenstern (1972 p7).
Morgenstern asks why a conclusion of preference is reached simply because a consumer chooses a good
among three bundles of goods in which he can afford to buy all. Morgenstern further noted that if x, y, z are
durable goods and the individual is capable (by virtue of his income) of acquiring all three, he can choose x
before y, or y before x, or z before x, etc., as he pleases; nothing is "revealed."Or he can choose all at once
in which case the inequalities are x >y > z. Let us dive into game theory. Mr. A covers three cups N1 N2 N3
upside down. Among these three covered cups one contains a coin and Mr. B is given the opportunity of
selecting the right cup containing the coin. Choice in the face of this option is not preferred but uncertain
which is called null choice. If Mr. B should choose either of the cup, he does not choose because it is a
preference rather it is chosen out of probability or uncertainty. If Mr. B actually knows which covered cup
contains the coin he would have gone for it (strong ordering) because that is where utility lied. But due to
the absence of physical evidence of utility he has no option than to employ guess work, under such
conditions we cannot conclude or agree that Mr. B actually preferred the cup he chose. A similar
illustration was given by (Timothy and Charles 2012 p5) who illustrated the choice of an individual
between two goods X and Y of which the individual intended to go for X but rather ended up choosing Y
and thus kicked against concluding on the revelation of preference which he called Failure of Game Form
Recognition i.e. the failure to recognize the connections between acts and their consequences. Timothy and
Charles (2012) further went on to warn that the mistaken choice should not be interpreted as a preference
for Y and the subject’s adjustment of choice due to a suspected or realized mistake should not be
considered a failure of rationality, but rather a misunderstanding/misconception of the task. This is why a
preference need not be defined by a choice and why the two concepts, preference and choice, should be
recognized as different and kept separate (Timothy and Charles 2012). Therefore uncertainty is also a
factor that influences choice. Strong ordering is primarily based on physical evidence of utility. We use
another illustration of a sick patient who knows the drugs that give him health comfort. Let us assume the
drugs to be C1 C2 and C3. Assuming among these three drugs one contains physical evidence of utility that
brings him comfort, thus such preference is backed by strong ordering.
The assumption of consumer’s tastes being static is totally unrealistic and cannot be argued to be true. It is
a well known fact that income plays a vital role in influencing choice and that consumption revolves around
budget line and price income line as stated by Professor Samuelson. But we must understand that some
consumers are willing to go beyond their budget line or price income line to acquire utility thus the price
income line should not be the only deciding factor of preference. Right choice or preference is only

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supported by strong ordering in the face of clear evidence of utility which is as a result of experience. These
experiences may be in the form of commercials, positive experiences of others and personal experiences.
However there are exceptional cases were experience may not aid in identifying utility due to time factors
that diminishes utility. For instance we know that the human body with time stops to respond to certain
drugs due to the body bacteria’s, germs or virus getting used to the drugs and becoming resistant. But in the
past a sick patient experienced health comfort from taking the drug therefore we assume that the sick
patient became ok for some time but later the ailment came back. Since the sick patient experienced utility
in the past from taking the particular drugs he may still think the drugs will still give him utility and
therefore rely on experience to make choice but only to find out that utility is no more. In this case
experience was of no value because experience could no longer detect utility because of the absence of
utility. Likewise people’s experiences and commercials may or may not help in experiencing utility that
determines preference. These are all gambles or probabilities that are summarized into Present Moment
Factors that influence choice and may or may not reveal preference. But the bottom line is that as long as
targeted and unexpected utility(ies) are experienced then we can then we conclude that preference is
revealed. Unexpected or coincidental utilities are never rejected and can prevent the need to still acquire
unachieved targeted utility(ies) that can be gotten somewhere else especially when there might be a waste
of resources. Another illustration is that of an individual who relied on the experiences of others and
commercials to make choice but becomes unfortunate to not experience utility. According to professor
Samuelson factors such as love for combination of goods that may be as a result of preference over other
goods, cheaper goods and income are the primary factors that influence choice/ preferences. But we
disagree that these factors be considered the primary factors alone. This is because other factors e.g. null
choices like the cup covered coin experiment and the food illustration all contribute in influencing choice
but not necessarily preference. Choices are influenced by rationale which are all aimed at achieving utility
and are categorized into two which we title choice-preference rationale tree which is an idea borrowed from
Rational Choice Theory and Expected Utility Hypothesis
Figure 1: Choice-Preference rationale tree
A B
Null choice
Hypothesis
Alternative choice
Hypothesis
Choice made as a result of physical
evidence of utility which may or may not be
determined by factors such as experience,
commercials and people’s experiences
Choice made under uncertainty Choice made under certainty
Outcome of choice may or may not be
known is known strongly and in ignorant
assumption before being made
Outcome of choice is always not known till
after being made.
Choice made in the absence of physical
evidence of utility but can eventually reveal
preference if utility is after wards
experienced
Characteristics Characteristics

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In Figure 1: all human rational for choice rests on this diagram. The ignorant assumption stated in
Alternative choice hypothesis implies that an individual may have the belief of experiencing utility as in the
case of the illustration of individuals that relied on experience to make choice but never experienced utility.
They confidently made a choice with ignorant assumption (i.e. they are not aware that they are in
assumption when they make choice believing they are making choice in the face of physical evidence of
utility due to experience but end up not experiencing utility).
Summary
A consumer’s choice does not actually reveal his preference, neither is it only as a result of substitution in
the face of dearness or cheapness or income and price. Preference is based on physical evidence of utility.
A consumer’s choice can only be seen as preference only when it is backed up by strong ordering
according to Professor Hicks view. This is because strong ordering is backed up by physical evidence of
utility that stimulates preference. Demand in itself should not be taken to be the factor that reveals
preference. Choice is a phenomenon that is determined by Present Moment Factors (i.e. anything can
influence choice including both Null and Alternative choice hypothesis. But only utility reveals preference)
Utility can be found after a choice is made but only when choice eventually yields utility despite being
made under uncertainty. The evidence of preference is sought by Morgenstern (1972 p7) who stated that
preference can only be known either through direct questioning or indirectly by carefully designed
experiments. In this case we can know preference by the outcome of utility such as joy, happiness, peace
and fulfillment which are all evidently physical and varies between individuals.
Conclusion
Choice is determined by Present Moment Factors while preference is revealed determined by utility.
Conflict of Interest
The author states no conflict of interest
Acknowledgement
Thanks to God Almighty for the inspiration to write this review.
References
Moral expectation", under Jeff Miller, Earliest Known Uses of Some of the Words of Mathematics (M),
accessed 2011-03-24. The term "utility" was first introduced mathematically in this connection by
Jevons in 1871; previously the term "moral value" was used.
M.L. Jhingan: Advanced Economic Theory 13th edition (2009).
Oskar Morgenstein: Thirteen critical points in contemporary economic theory: An Interpretation, Journal of
Economic Literature: 10.1163-1189. JSTOR 2721542, (1972).
P.A. Samuelson: Foundations of Economic Analysis, and Consumption Theorems in Terms of Over-
Compensation Rather than Indifference Comparisons’’ Economica (1947).
Timothy N. Cason, Charlse R Plott (2012) Misconceptions and Game Form Recognition of the BDM
Method: Challenges to Theories of Revealed Preference and Framing.