Experience Based Dynamic Choice: A Revealed Preference Approach

Abstract: We use the revealed preference method to derive a model of dynamic choice where the agent’s past experience may influence her current decisions. Our model generalizes the classical individual choice model which is rationalized by utility maximization, and reduces to that model in the absence of experience. As the agent gains experience her utility changes but only in a very restricted fashion. Every period, after an alternative is chosen, the utility of that, and only that alternative, may change while the utility of all other alternatives remains fixed. The model provides a platform on which many behavioral dynamic phenomena may be examined. We utilize it and look into the behavioral implications of bounded memory, status quo bias and variety seeking.

Keywords: Experience, Dynamic Choice, Memory, Status Quo Bias, Revealed Preference.

JEL Codes: D11, D83