The Problems of Testing Preference Axioms with Revealed Preference Theory

Abstract

In economics, it has often been claimed that testing choice data for violation of certain axioms-particularly if the choice data is observed under laboratory conditions-allows conclusions about the validity of certain preference axioms and the neoclassical maximization hypothesis. In this paper I argue that these conclusions are unfounded. In particular, it is unclear what exactly is tested, and the interpretation of the test results are ambiguous. Further, there are plausible reasons why the postulated choice axioms should not hold. Last, these tests make implicit assumptions about beliefs that further blur the interpretations of the results. The tests therefore say little if anything about the validity of certain preference axioms or the maximization hypothesis.