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Eureka: The revealed preference puzzle
by Jay Gutman
2017-11-15 09:31:02
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One of the great mysteries of economics. One that is often misunderstood. Most attempts to solve it involved economists thinking of consumers as independent individuals. Unfortunately, like it or not, consumers are often interdependent individuals whose consumer choices affect their personal preferences as well as that of their co-dependents.

puz1The revealed preference puzzle is one that poses the following question: is there an order to consumer preference. That is, if a consumer buys cigarettes first, then a lighter, then a cup of coffee, does that mean anything in terms of his consumer preferences. Or let's say if a consumer buys a car first, then an appartment, then a television, does that say anything about his order of preference.

As always, I don't solve problems, be it in math, economics, linguistics, sociology, security, politics or in any other field by providing detailed answers,, rigorously written papers or orderly refelctions. I'll leave that to the day I receive my paycheck every 25th of the month. For the time being, here in Ovi, I merely provide answers as if I were the professor and a student were to ask me the question.

The formulation of the revealed preference puzzle itself is puzzling. One way to answer it is, as grandmothers like to say, what's my favorite finger? I wouldn't want to lose any finger, so I don't have favorite fingers. What can we say about consumer preferences? Let me sketch out a model for you on how consumers tend to like to consume products.

First, there are survival needs. Second there are solidarity needs. Third, there are altruistic or narcissistic needs. Then there are emotional needs. Then there are factual needs. Then there are narrative needs. These needs are not hierarchical, but sort of criss-cross in terms of consumer needs. Let me break them down for you.

Food is always a survival need. But can also be consumed for solidarity purposes, as in buying your sister a chocolate bar. Then there is consumption for altruistic needs, say buying ten cartons of milk for the soup kitchen. Then food can be an emotional need rather than a survival need, let's say eating ice cream after a break up or any other emotional consumption of food. Then there is the factual need, as in trying falafel because I've seen it everywhere yet never tasted it. Then there is the narrative need as in taking your girlfriend to that restaurant you really like to tell her stories of your past life at that restaurant.

The same could be said about the consumption of any product. Some can be for survival and emotional reasons, others for solidarity and narrative reasons and so on. Now for semantic purposes, let me define the terms I just described above.

Survival needs consumption: something you buy because you would not survive without it, usually food or water, or any addictive product. Could also be a roof or any product that directly or indirectly leads to your survival.

Solidarity needs consumption: something you buy not for your own needs, but for the needs of your peers. Could be family, friends, any other person or animal or plant that you are helping survive or thrive. As in buying your girlfriend a bracelet or buying your friend a cup of coffee.

Altruistic/Narcissistic needs consumption: something you buy to give to people who need it or to enhance your own self-image. A new suit or donating goods to a country that just experienced a disaster, and everything in between.

Emotional needs consumption: Buying something based on an emotional need, that could be love, joy, or to repress anger or furstration. Buying a bottle of wine to celebrate your favorite team's victory at a sporting event could be an example. Or buying that smart phone because your worst enemy just bought a better one so you need an even better one.

Factual needs consumption: You just read an article about some product that you want to test and see how it works. Or someone told you about a product that you want to see for yourself. Any consumption that satisfied curiosity needs.

Narrative needs consumption: A product that you buy because it helps you tell a story. Any collectibles, visits, tourism, or product that helps you tell a story.

So to wrap up, let take an example of product that a lot of us buy and yet whose need we don't quite understand: tourism. We visit places. Why? Probably not for survival purposes. We would survive staycationing at home. Solidarity? Yes. Like that time my parents sent me to that awesome trip, several times actually. Altruistic? Yes, like sending a group of needy kids on a field trip. Narcissistic? Yes, like going on that cruise ship so you can take pictures and upload them on Facebook and Instagram. Emotional? Yes. Like when newly divorced people go backpacking to forget their pain. Factual? Yes, like trying to see what the Himalayas really look like. Narrative? Yes, like wanting to try durian so you can tell your friends about it.

So the original question was, is there an order of preference in consumer choices? Well, when I clean my house sometimes I start sweeping the floor, sometimes I make the bed first, sometimes I do the dishes first and sometimes I take the dust out first. Does that reflect an order of preference? Like cleaning a house, consumer choices are impacted by individual as well as collective choices, sometimes satisfy individual needs and sometimes satisfy the needs of your direct dependents. A mistake a lot of economists do is to study consumption based on individual behavior. I think, probably, I'm the first guy who offered an explanation on consumption based both on individual needs and on the needs of the community at large, which includes feeding the dog and watering the plants.

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