Eliciting the just-noticeable difference

Pawel Dziewulski

No 798, Economics Series Working Papers from University of Oxford, Department of Economics

Abstract: Abstract The evidence from psychophysics suggest that people are unable to discriminate between alternatives unless the options are significantly different. Since this assumption implies non-transitive indifferences, it can not be reconciled with utility maximisation. We provide a method of eliciting consumer preference from observable choices when the agent is incapable of discerning between similar bundles. It is well-known that the issue of noticeable differences can be modelled with semiorder maximisation. We introduce a necessary and sufficient condition under which a finite dataset of consumption bundles and corresponding budget sets can be rationalised with such a relation. The result can be thought of as an extension of Afriat's (1967) theorem to semiorders, rather than utility optimisation. Our approach is constructive and allows us to infer the just-noticeable difference that is sufficient for the agent to differentiate between bundles as well as the "true" preferences of the consumer (i.e., as if perfect discrimination were possible). Furthermore, we argue that the former constitutes a natural measure of how well the preference revealed in the data could be approximated by a weak order. We conclude by applying our test to household-level scanner panel data of food expenditures. Revised June 2017.

Keywords: Revealed preference; testable restrictions; semiorder; just-noticeable difference; GARP; Afriat's efficiency index; money-pump index (search for similar items in EconPapers)
JEL-codes: C14 C60 C61 D11 D12 (search for similar items in EconPapers)
Date: 2016-07-06
New Economics Papers: this item is included in nep-mic and nep-upt
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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