Temptation-Driven Preferences

"My own behaviour baffles me. For I find myself not doing what I really want to do but doing what I really loathe." Saint Paul
What behaviour can be explained using the hypothesis that the agent faces temptation but is otherwise a "standard rational agent"? In earlier work, Gul and Pesendorfer (2001) use a set betweenness axiom to restrict the set of preferences considered by Dekel, Lipman and Rustichini (2001) to those explainable via temptation. We argue that set betweenness rules out plausible and interesting forms of temptation including some which may be important in applications. We propose a pair of alternative axioms called DFC, desire for commitment , and AIC, approximate improvements are chosen . DFC characterizes temptation as situations in which given any set of alternatives, the agent prefers committing herself to some particular item from the set rather than leaving herself the flexibility of choosing later. AIC is based on the idea that if adding an option to a menu improves the menu, it is because that option is chosen under some circumstances. From this interpretation, the axiom concludes that if an improvement is worse (as a commitment) than some commitment from the menu, then the best commitment from the improved menu is strictly preferred to facing that menu. We show that these axioms characterize a natural generalization of the Gul–Pesendorfer representation.     

Decision Theory without Logical Omniscience: Toward an Axiomatic Framework for Bounded Rationality

I propose modelling boundedly rational agents as agents who are not logically omniscient—that is, who do not know all logical or mathematical implications of what they know. I show how a subjective state space can be derived as part of a subjective expected utility representation of the agent's preferences. The representation exists under very weak conditions. The representation uses the familiar language of probability, utility, and states of the world in the hope that this makes this model of bounded rationality easier to use in applications.     

Manipulation and the Pareto rule

This paper examines rules that map preference profiles into choice sets. There are no agendas other than the entire set of alternatives. A rule is said to be “manipulable” if there is a person i, and a preference profile, such that i prefers the choice set obtained when he is dishonest to the one obtained when he is honest. It is “nonmanipulable” if this can never happen. The paper indicates how preferences over choice sets might be sensibly derived from preferences over alternatives, and discusses seven different notions of manipulability associated with seven different assumptions about preferences over sets of alternatives. The paper has two sections of results. In the first I show that the Pareto rule, that is, the rule that maps preference profiles into corresponding sets of Pareto optima, is nonmanipulable in four of the seven senses of manipulability, and manipulable in three of them. In the second section, I examine this conjecture: If an arbitrary rule is nonmanipulable and nonimposed, and if indifference is disallowed, then every choice set must be contained in the set of Pareto optima. The conjecture is true under the strongest definition of nonmanipulability.     

What is a commodity? Two axiomatic answers

Summary. We identify conditions under which preferences over subsets of a consumption world can be reduced to preferences over bundles of "commodities". We distinguish ordinal bundles, whose coordinates are defined up to monotone transformations, from cardinal bundles, whose coordinates are defined up to positive linear transformations.Received: 27 March 2002, Revised: 17 March 2003, JEL Classification Numbers: D11.I am grateful to S. Barberá, C. Chambers, K. Nehring, and O. Sprumont for stimulating conversations and useful remarks. I also thank a referee for helpful comments, and the Social Sciences and Humanities Research Council of Canada for support.     

The Revealed Preference Theory of Changing Tastes

We analyse preferences over finite decision problems in order to model decision-makers with „changing tastes”. We provide conditions on these preferences that identify the Strotz model of consistent planning. Building on an example given by Peleg and Yaari (1973) , we show that for problems with infinitely many choices, Strotz's representation of preferences may not be well defined. For that case, we propose a well-defined approximation which is empirically indistinguishable from the Strotz preference that is being approximated.     

Another Graphical Proof of Arrow's Impossibility Theorem

Arrow's (1951) Impossibility Theorem is the idea that, given several well-known assumptions, the social orderings of particular alternatives that are meant to reflect individuals' preferences must match the preferences of an arbitrary individual (the dictator). A social-choice rule other than dictatorship is impossible. Following from Fountain (2000), the author presents another graphical proof of the theorem that is intended to be more accessible to students and teachers of economics. The principal strength of this approach is that the patterns of agreements and conflicts over all possible combinations of two individuals' rankings of alternatives are transparent; appreciating these patterns is the key to intuitively understanding Arrow's theorem. A self-test for readers (or a classroom exercise for students) is included.     

The ABC mechanism: an incentive compatible payoff mechanism for elicitation of outcome and probability transformations

When it comes to experiments with multiple-round decisions under risk, the current payoff mechanisms are incentive compatible with either outcome weighting theories or probability weighting theories, but not both. In this paper, I introduce a new payoff mechanism, the Accumulative Best Choice (“ABC”) mechanism that is incentive compatible for all rational risk preferences. I also identify three necessary and sufficient conditions for a payoff mechanism to be incentive compatible for all models of decision under risk with complete and transitive preferences. I show that ABC is the unique incentive compatible mechanism for rational risk preferences in a multiple-task setting. In addition, I test empirical validity of the ABC mechanism in the lab. The results from both a choice pattern experiment and a preference (structural) estimation experiment show that individual choices under the ABC mechanism are statistically not different from those observed with the one-round task experimental design. The ABC mechanism supports unbiased elicitation of both outcome and probability transformations as well as testing alternative decision models that do or do not include the independence axiom.

     

Preference for flexibility in the absence of learning: the risk attitude effect

Individuals’ preferences over opportunity sets may display “preference for flexibility” which prescribes to gradually eliminate alternatives from a given set until a final choice is made. One rationale for this preference for flexibility is individuals’ incentive to postpone the final choice in order to better learn their underlying preferences over basic alternatives. In this paper we show that even in the absence of learning, preference for flexibility arises if individuals are risk-averse or, at least, are not very risk-seeking. Thus, individual’s attitude towards risk provides yet another rationale for preference for flexibility. One of our results is that in the absence of learning, risk-neutral as well as risk-averse individuals display the same, maximal preference for flexibility. We thank Han Bleichrodt, Robert Dur, Chaim Fershtman, Maarten Janssen, Peran van Reeven, Peter Wakker, and Timothy van Zandt for helpful comments to and inspiring discussions. We are very grateful to the anonymous referee for very constructive comments and suggestions.     

Rationality without Transitivity

In this article rational choice behavior is investigated without assuming transitivity or completeness of the underlying preferences. These standard properties are replaced by a property concerning dominant alternatives. This permits the existence of preference cycles among alternatives which are dominated, while still ensuring the existence of a rational choice correspondence. We will also realize that some rational choice rules still hold in this context. Further we will see that in equilibrium analysis the existence of a competitive equilibrium follows when transitivity and completeness is replaced by this domination property.     

PREFERENCES UNDER IGNORANCE

A decision maker (DM) makes choices from different sets of alternatives. The DM is initially ignorant of the payoff associated with each alternative and learns these payoffs only after a large number of choices have been made. We show that, in the presence of an outside option, once payoffs are learned, the optimal choice rule from sets of alternatives can be rationalized by a DM with strict preferences over all alternatives. Under this model, the DM has preferences for preferences while being ignorant of what preferences are “right.”     

How upside down are political business cycles when there is output persistence

This note shows in what circumstances output persistence may invert the pattern of the political business cycle when inflation expectations are of the adaptive or rational type and the government preferences are quadratic over output and inflation.     

Utility from anticipation and personal equilibrium

I develop a dynamic model of individual decisionmaking in which the agent derives utility from physical outcomes as well as from rational beliefs about physical outcomes (“anticipation”), and these two payoff components can interact. Beliefs and behavior are jointly determined in a personal equilibrium by the requirement that behavior given past beliefs must be consistent with those beliefs. I explore three phenomena made possible by utility from anticipation, and prove that if the decisionmaker’s behavior is distinguishable from a person’s who cares only about physical outcomes, she must exhibit at least one of these phenomena. First, the decisionmaker can be prone to self-fulfilling expectations. Second, she might be time-inconsistent even if her preferences in all periods are identical. Third, she might exhibit informational preferences, where these preferences are intimately connected to her attitudes toward disappointments. Applications of the framework to reference-dependent preferences, impulsive behaviors, and emotionally difficult choices are discussed.     

Tit for tat: Foundations of preferences for reciprocity in strategic settings

This paper assumes that in addition to conventional preferences over outcomes, players in a strategic environment have preferences over strategies. It provides conditions under which a player's preferences over strategies can be represented as a weighted average of the utility from outcomes of the individual and his opponents. The weight one player places on an opponent's utility from outcomes depends on the players’ joint behavior. In this way, the framework is rich enough to describe the behavior of individuals who repay kindness with kindness and meanness with meanness. The paper identifies restrictions that the theory places on rational behavior.     

Welfare Economics with Intransitive Revealed Preferences: A Theory of the Endowment Effect

Economists use the standard rational model to predict behavior after a policy change and to determine the policy's welfare implications. Recent experimental observations are casting doubt on the predictive accuracy of the standard model, but the more realistic behavioral alternatives often provide a poor basis for making normative evaluations. This paper suggests that we can still predict behavior and measure welfare within the same model. We show that optimizing agents with standard preferences will in some cases behave as if they are subject to an endowment effect. Even so, we may still be able to uncover information about their preferences.     

The (sub-)optimality of the majority rule

We consider collective choice from two alternatives. Ex-ante, each agent is uncertain about which alternative she prefers, and may be uncertain about the intensity of her preferences. An environment is given by a probability distribution over utility vectors that is symmetric across agents and neutral across alternatives. In many environments, the majority voting rule maximizes agents? ex-ante expected utilities among all anonymous and dominant-strategy implementable choice rules. But in some environments where the agents? utilities are stochastically correlated, other dominant-strategy choice rules are better for all agents. If utilities are stochastically independent across agents, majority voting is ex-ante optimal among all anonymous and incentive-compatible rules. We also compare rules from an interim-viewpoint.     

Characterization of the private alternatives domains admitting arrow social welfare functions

An n-person social choice problem is considered in which the alternatives are n dimensional vectors with the ith component of such a vector being the part of the alternative effecting individual i alone. Assuming that individuals are selfish (i is indifferent between any two alternatives that have the same ith component) we characterize all the families of permissible individual preferences that admit nondictatorial Arrow-type social welfare functions. We also show that the existence of such a function for a given family of preferences is independent of n provided that is greater than one.     

Constant scoring rules,condorcet criteria and single-peaked preferences

Summary A constant scoring rule asks each individual to vote for a given (and constant) number of alternatives and the alternative with the most votes is elected. A sequential constant scoring rule applies this principle in a process of sequential elimination. Constant scoring rules as well as sequential constant scoring rules fail to satisfy Condorcet criteria when individual preferences are unrestricted. The purpose of this paper is to show that, if we assume that preferences are single-peaked, then some constant scoring rules satisfy the Condorcet loser criterion and some sequential constant scoring rules satisfy the Condorcet winner criterion. The results we provide make possible the identification of these rules.I thank Maurice Salles and two anonymous referees for their helpful comments. The usual disclaimers apply.     

On the rationalizability of observed consumers’ choices when preferences depend on budget sets and (potentially) on anything else

We prove that defining consumers’ preferences over budget sets is both necessary and sufficient to make every fully informative and finite set of observed consumption choices rationalizable by a collection of preferences which are transitive, complete, and monotone with respect to own consumption. Our finding has two important theoretical consequences. First, assuming that preferences depend on budget sets is illegitimate under the scientific commitments of revealed preference theory. Second, as long as consumers’ preferences are not defined over budget sets, we can assume that preferences depend on observable objects other than own consumption without compromising the logical possibility to reject the model against observation. We however point out that, despite this logical possibility, in practice it can be almost impossible to reject a model where preferences are defined over objects that depend on budget sets. As an example of this we show that if preferences are defined over consumption choices of other individuals then rationalization fails only in cases of negligible practical interest.     

Mutual Enmity: Deposit Insurance and Economic Democracy

“Symbolic consumption” is formally unrelated to “second-order preferences”, but the ability to symbolically consume and the ability to have preferences about one's preferences are each uniquely human characteristics. The major question addressed in this paper is this: are symbolic preferences more or less likely than other preferences to be “unpreferred” by the agent experiencing and acting upon them? In previous writings on second-order preferences, I demonstrated the propensity of market forces to overproduce preferences that are judged to be worse than what they replace and underproduce preferences that are judged to be better. In this paper, I offer reasons for believing that the market inefficiency in preference production suggests a decline in symbolic consumption.     

Minimal belief change, Pareto-optimality and logical consequence

Summary. A rational agent changes her beliefs in response to new information; a widely held idea is that such belief changes should be minimal. This paper is an overview of the theory of minimal belief revision. I employ a decision-theoretic framework to compare various principles for minimal belief revision. The main topics covered include the AGM postulates for belief revision, belief contraction, Grove's representation theorem, axioms for conditionals, and the connections between minimal belief change and questions in formal logic. I characterize under what conditions belief revision functions are consistent with the Levi Identity, and under what conditions belief contraction functions are consistent with the Harper Identity. Received: August 20, 2000; revised version: March 19, 2001