Rationality and Error in Individual Choice Data: A Revealed Preferences Approach by Aluma Dembo

Join us for the another event in the Microeconomics Research Seminar Series, Spring Term 2022

Aluma Dembo from Reichman University; IDC, Herziliya, will present their research on Rationality and Error in Individual Choice Data: A Revealed Preferences Approach

Abstract 

Classic economic theory uses the rationality assumption to infer preferences from observed choices, but provides scant guidance on when choice data has error. Methods to estimate preferences from noisy data inevitably invoke additional structural assumptions on those very preferences. This paper presents a procedure to detect and measure error in an individual's observed choice data when the individual has an underlying rational choice process that has been contaminated with random implementation errors. Using a single individual's choices over many menus, I construct an observed revealed preference relation, and prove it is a random graph whose acyclicity is equivalent to rationality. Exploiting the structure in the graph produced by the contaminating errors, I devise a classifier able to detect which observations are errors and an estimator to measure the rate at which errors occur. These two methods can be applied to any dataset in which an individual makes constrained choices from a sequence of overlapping non-identical menus, regardless of the choice environment (e.g. continuous, discrete, or high dimensional). I apply the method to a benchmark dataset of choices observed in the lab (Choi et al. 2007) and show that most individuals have error rates between 5% and 14.5% (interquartile range). I show that three existing measures of goodness-of-fit for rationality, which are often used as proxies for error estimates, are either not robust, not identified, or biased when choices are observed with error.

This seminar will be held at the Colchester Campus in the Economics Common Room (5B.307) at 4pm, but will also be available on Zoom. This event is open to all levels of study and is also open to the public. To register your place and gain access to the webinar, please contact the seminar organisers.

This event is part of the Microeconomics Research Seminar Series.