[download the online appendix]

This paper provides axiomatic foundations for a nested family of habit formation models, based on an intertemporal theory of weaning a decision-maker from her habits using the device of compensation. 

[read a related article I wrote for VoxEU]

The myopic actions of players may lead to the break up of groups in the short run, but can ultimately bring about a situation from which a strictly self-enforcing allocation can be reached. 

We allow a decision maker’s risk attitute to be affected by his history of disappointments and elations. We establish equivalence between the model and two cognitive biases: risk attitude is reinforced by experience (there is greater risk aversion after disappointment than elation) and there is a primacy effect (early outcomes have the greatest impact).

We show Savage’s axioms admit a continuum of other “expected utility” representations, where probability distributions over states capture forms of pessimism or optimism. Optimists, pessimists, and standard Savage agents can be distinguished if the choice domain includes subjective acts and objective lotteries

Peer-reviewed at NAJ Economics

We adapt the classic, revealed-preference approach to new forms of revealed information. We apply our methodology to an array of bounded rationality theories, showing its versatility. We identify theories and datasets that are testable in the same elegant way as Rationality, as well as theories and datasets for which testing is more challenging.

A decision maker may find it good enough to maximize her preference over a large-enough consideration set; just pick something that  sufficiently well-ranked (e.g., in the top quintile); or even endogenously determine a threshold for what is good enough based on an initial sampling of options. Such natural heuristics are encompassed by a common theory of Order-k Rationality, which relaxes perfect optimization by only requiring choices from a set S to fall in the top k(S) elements. Heuristics aside, this departure from rationality offers a natural way, in the classic ‘as if’ tradition, to gradually accommodate more choice patterns as k increases.

We propose relaxing the first-order conditions in optimization to approximate rational consumer choice. We assess the magnitude of departures with a new, axiomatically-founded measure that admits multiple interpretations, including in terms of price misperception. Standard inequality tests of rationality for any given reference class of preferences can be conveniently re-purposed to measure goodness-of-fit with that class. Another advantage of our approach is that it is applicable in any context where the first-order approach is meaningful (e.g., convex budget sets arising from progressive taxation). We apply these ideas to shed new light on existing portfolio-choice data.

We study the empirical content of serial dictatorship and the core of housing markets. Under serial dictatorship, allocations reveal restrictions on the power ranking between agents. Testing for consistency with serial dictatorship amounts to checking whether there is an ordering satisfying these restrictions, which can be done using a simple generalization of the procedure used to check SARP. When it comes to voluntary trade instead, we characterize the empirical content of the core in Shapley and Scarf (1974)’s housing markets using revealed top-trading cycles. This characterization proves useful in many examples, but is also used to show that testing core consistency can be much more complex.