Revealed Preference and the Subjective State Space Hypothesis

Dekel et al. (2001) extends Kreps’ (1979) model for preference over menus of deterministic alternatives to a model for preference over menus of lotteries. They show that a simple set of axioms characterizes a representation that can be interpreted as if the agent is uncertain about her future tastes. This taste uncertainty is summarized by a set of possible future preferences which is referred to as the subjective state space. Their approach is axiomatic; thus, testability requires that the entire preference order be observable. This paper provides corresponding revealed preference analysis assuming that only finitely many choices are observed. For a particular class of data sets, it is shown that the characterizing conditions can be reformulated as nonlinear systems of inequalities for which the existence of solutions can be verified using numerical methods. The analysis covers the case where available data involves only menus of alternatives (and not lotteries). Hence, our results also provide revealed preference characterizations for Kreps (1979).