Economics Colloquium

Some Misconceptions about Preferences

Dan Hausman

Herbert A. Simon and Hilldale Professor
Department of Philosophy

University of Wisconsin – Madison

In this talk, which is drawn from my book, Preference, Value, Choice and Welfare (Cambridge University Press, 2011), I argue that preferences in economics are and ought to be understood as total comparative evaluations. They are consequently more like judgments than feelings, and they are not mere matters of taste. They cannot be defined by choices (as revealed preference theorists mistakenly maintain), and they cannot be defined in terms of self‐ interest or expected benefit. In addition, in contrast to what many economists believe, I shall argue that economics already contains an account of preference formation, and that it can  and  should say more about how agents form and modify their preferences.

This article gives you a preview:

In particular, I shall discuss three mistakes concerning preferences that are common among economists and other social scientists. There are others, but this article will be long enough as it is.

• Preferences are matters of taste, concerning which rational criticism or discussion is inapplicable.
• Preference rankings are rankings of alternatives in terms of expected (self-interested) benefits.
• Preferences can be defined in terms of choices, as in revealed-preference theory.

And in a recent interview, this is what Professor Hausman has to say about his book:

The book is about preferences, mainly as they are and ought to be understood in economics, but I also have some things to say about preferences in everyday language and action, in psychology, and in philosophical reflection on action and morality. In this book I clarify the notion of preferences that economists rely on and to a considerable extent defend the way economists use the notion of preference. But I am also critical of misconceptions concerning preferences that many economists and other social scientists hold.

In the economist’s picture of choice and welfare, agents rank alternatives in terms of everything that matters to them. Preferences are, in this sense, total comparative evaluations. Among the available alternatives, the agent then chooses as far up the preference ranking as the constraints—such as prices or availability—allow. How far up the agent is able to go determines how well off the agent is.

In positive economics, this preference ranking governs people’s choices. In normative economics, the objective is to move people up their preference rankings. The principles of positive economics are mostly generalizations concerning preferences and what they imply for choice. Normative economics is concerned with how best to satisfy preferences. Preferences lie at the core of mainstream economic theory, and my book aims to clarify what preferences are and how they figure in economic theory and practice.