Scandinavian Working Papers in Economics

Working Paper Series,
Research Institute of Industrial Economics

No 142: Endogenous Preferences and Adaptive Economizing

Richard H. Day
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Richard H. Day: Research Institute of Industrial Economics (IFN)

Abstract: Our concern is with economizing behavior when preferences depend on experience. It is shown that such dependence, reflecting 'deep psychological structure', even when it is stable or habit forming in a fixed environment, can be destabilizing in a market context when prices are adjusting, even when the latter process is stable when preferences are fixed. I Preference reversal' is then shown to be a cause of cyclic or non-periodic sequences of rational choices, thus providing an explanation both of normal variety and addictive binges in consumption. The relationship between cyclicity and intertemporal consistency is discussed. It is suggested that intertemporally optimal behavior is in principle not possible. Instead, behavior must be governed by adaptive economizing procedures which have only an approximate, local and imperfectly far-sighted rationality.

Keywords: Preference reversal; consumption binges; optimal choice

JEL-codes: D03; D11; D91

36 pages, May 1985

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