Working Paper: NBER ID: w13976
Authors: John Beshears; James J. Choi; David Laibson; Brigitte C. Madrian
Abstract: Revealed preferences are tastes that rationalize an economic agent's observed actions. Normative preferences represent the agent's actual interests. It sometimes makes sense to assume that revealed preferences are identical to normative preferences. But there are many cases where this assumption is violated. We 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 uses 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.
Keywords: revealed preferences; normative preferences; consumer behavior; decision-making; policy implications
JEL Codes: A11; B4; D01; D60; G11; H1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| passive choice (D87) | decisions that do not reflect true preferences (D91) |
| decisions that do not reflect true preferences (D91) | outcomes that do not align with normative interests (D63) |
| defaults set to non-participation in retirement plans (J32) | enrollment rates drop (I21) |
| complexity in decision-making (D91) | likelihood of individuals defaulting to simpler options (D91) |
| number of investment options increases (G11) | participation rates in savings plans decrease (D14) |
| limited personal experience (C90) | gap between revealed and normative preferences (D11) |