Revealed preference theory, pioneered by American economist Paul Samuelson, is a method of analyzing choices made by individuals, mostly used for comparing the influence of policies on consumer behavior. These models assume that the preferences of consumers can be revealed by their purchasing habits. Revealed preference theory came about because existing theories of consumer demand were based on a diminishing marginal rate of substitution (MRS). This diminishing MRS relied on the assumption that consumers make consumption decisions to maximize their utility. While utility maximization was not a controversial assumption, the underlying utility functions could not be measured with great certainty. Revealed preference theory was a means to reconcile demand theory by defining utility functions by observing behavior.
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- When Paul Samuelson introduced the idea of revealed preference, I have little doubt that he was only trying to ground economic theory in observable behavior, as required by the positivism of the 1930s, and do away with unnecessary concepts.
- Douglas Gale, "Revealed Preference and Bounded Rationality" in Andrew Caplin and Andrew Schotter, eds. The foundations of positive and normative economics: a handbook (2008)