Revealed Preference

Revealed preference, a theory offered by American economist Paul Anthony Samuelson in 1938, states that consumer behavior, if their income and the item’s price are held constant, is the best indicator of their preferences.

For a long time, consumer behavior, most notably consumer choice, had been understood through the concept of utility. In economics, utility refers to how much satisfaction or pleasure consumers get from the purchase of a product, service, or experienced event. However, utility is incredibly difficult to quantify in indisputable terms, and by the beginning of the 20th Century, economists were complaining about the pervasive reliance on utility. Replacement theories were considered, but all were similarly criticized, until Samuelson’s “Revealed Preference Theory,” which posited that consumer behavior was not based on utility, but on observable behavior that relied on a small number of relatively uncontested assumptions.

Revealed preference is an economic theory regarding an individual’s consumption patterns, which asserts that the best way to measure consumer preferences is to observe their purchasing behavior. Revealed preference theory works on the assumption that consumers are rational. In other words, they will have considered a set of alternatives before making a purchasing decision that is best for them. Thus, given that a consumer chooses one option out of the set, this option must be the preferred option.

Revealed preference theory allows room for the preferred option to change depending upon price and budgetary constraints. By examining the preferred preference at each point of constraint, a schedule can be created of a given population’s preferred items under a varied schedule of pricing and budget constraints. The theory states that given a consumer’s budget, they will select the same bundle of goods (the “preferred” bundle) as long as that bundle remains affordable. It is only if the preferential bundle becomes unaffordable that they will switch to a less expensive, less desirable bundle of goods.

The original intention of revealed preference theory was to expand upon the theory of marginal utility, coined by Jeremy Bentham. Utility, or enjoyment from a good, is very hard to quantify, so Samuelson set about looking for a way to do so. Since then, revealed preference theory has been expanded upon by a number of economists and remains a major theory of consumption behavior.

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