Classifying bounded rationality in limited data sets: a Slutsky matrix approach

Abstract

Abstract Given any observed finite sequence of prices, wealth, and demand choices, we propose a way to measure and classify the departures from rationality in a systematic fashion, by connecting violations of the underlying Slutsky matrix properties to the length of revealed demand cycles. The approach complements our previous study (Aguiar and Serrano in J Econ Theory 172:163–201, 2017), which is based on the entire demand function. The methodology can be easily applied in experimental demand data sets.

Keywords

• Consumer theory
• Rationality
• Slutsky matrix norm
• Revealed preference approach
• Bounded rationality