Random Utility Theory

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Random utility theory posits that people generally choose what they prefer, and where they do not, this can be explained by random factors. For example, a person may choose their preferred ice cream 9 out of 10 times and on the 10th occasion they choose something else due to some random factor.

The term 'random' in this instance has a very precise meaning. The variations in behavior due to randomness must not be explainable. That is, if it is known that the reason that the consumer deviated from their preferred ice cream on the 10th occasion is because it was out of stock then this is not a random phenomenon.

Random utility theory is not an acccurate description of human behaviour.[1] Nevertheless, checking that models of behavior are consistent with random utility theory provides is a way of checking that the models do not have silly and inconsistent assumptions.

Utility theory, which random utility theory is a special case of, has been criticised on the basis that it implies people are overly rational (i.e., that they have an 'irrational passion for dispassionate rationality'). However, although such an assumption is commonly made in situations where random utility theory is assumed, such an assumption is not a part of utility theory, as utility theory can readily be understood as the idea that people behave in line with self-interset where self-interest reflects peoples' needs to save time and economize on effort.[2]

References

  1. Daniel Kahneman (2011), Thinking, Fast and Slow, Farrar, Straus and Giroux.
  2. George J. Stigler and Gary S. Becker (1977): "De Gustibus Non Est Disputandum", The American Economic Review, Vol. 67, No. 2 (Mar), pp. 76-90.