Lexicographic Preferences, Rationality and the Fallacies of Behavioral Economics
Abstract
In this paper the differences between traditional economic theory and the relatively newer behavioral economic theory, which is a blend of economics and psychology, is discussed. The traditional assumptions regarding consumer preferences are explained and elaborated upon. This includes reflexivity, completeness, transitivity and continuity. Auxiliary assumptions, such as local nonsatiation and strict convexity, regarding preferences are also introduced. Lexicographic preferences in a two good world are explicated and demonstrated to encompass rational behavior even though they do not generate a well defined utility function. If a consumer has lexicographic preferences behavioral economists can be mistaken in thinking that consumer behavior is irrational.
Downloads
References
REFERENCES
Blume, L., Brandenburger, A., Dekel, E. (1991). Lexicographic Probabilities and Choice Under Uncertainty. Econometrica, 59(1), 61 – 79.
Debreu, G. (1954). Representation of a Preference Ordering by a Numerical Function. Decision Process. Thrall, Davis and Coombs, editors. John Wiley. New York, NY.
DellaVigna, S., Malmendier, U. (2009). Psychology and Economics: Evidence from the Field. Journal of Economic Literature, 47(2), 315 – 372.
Fishburn, P., (1974). Lexicographic Orders, Utilities and Decision Rules: A Survey. Management Science, 20(11), 1442 – 1471.
Fishburn, P., (1975). Axioms of Lexicographic Preferences. Review of Economic Studies, 42(3), 415 – 419.
Henderson, J., Quandt, R., (1980). Microeconomic Theory: A Mathematical Approach. 3rd ed. McGraw – Hill.
Kahneman, D. (2011). Thinking, Fast and Slow. Farrar, Straus and Giroux.
Knoblauch, V. (2000). Lexicographic Orders and Preference Representation. Journal of Mathematical Economics, 34(2), 255 – 267.
Kohli, A., Jedidi, K. (2007). Representation and Inference of Lexicographic Preference Models and their Variants. Marketing Science, 26(3), 380 – 399. doi: 10.1287/mksc.1060.0241
Silberberg, E., Suen, W. (2000). The Structure of Economics: A Mathematical Analysis. 3rd ed. W. W. Norton and Company.
Thaler, R. (2015). The Making of Behavioral Economics: Misbehaving. W. W. Norton, New York, NY.
Varian, H. (1992). Microeconomic Analysis. 3rd ed. W. W. Norton and Company.
TRANSFER OF COPYRIGHT
JRBEM is pleased to undertake the publication of your contribution to Journal of Research in Business Economics and Management.
The copyright to this article is transferred to JRBEM(including without limitation, the right to publish the work in whole or in part in any and all forms of media, now or hereafter known) effective if and when the article is accepted for publication thus granting JRBEM all rights for the work so that both parties may be protected from the consequences of unauthorized use.
