Behav­ioral Finance Lec­ture 01: Debunk­ing Revealed Pref­er­ence

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I lec­ture on Behav­ioral Finance at the Uni­ver­sity of West­ern Syd­ney this semes­ter, and will record all my lec­tures and post them on my YouTube Chan­nel Prof­Steve­Keen. In this first lec­ture (after the usual pre­lim­i­nar­ies of explain­ing assess­ment and the like to my 85 third year stu­dents), I cover the Neo­clas­si­cal the­ory of con­sumer behav­ior.

As I note to my stu­dents, the con­cept I teach here–Revealed Preference–was taught in 1st year 40 years ago, when I was an fresher under­grad­u­ate. But the tuition of Neo­clas­si­cal eco­nom­ics has been so dumbed down over the years that my 3rd year stu­dents hadn’t heard of it before. I expect it’s reserved as pun­ish­ment for those who under­take an Hon­ors degree these days!

After out­lin­ing the the­ory, I then cover the excel­lent exper­i­men­tal dis­proof of the the­ory by the Ger­man econ­o­mists Rein­hard Sip­pel:

Sip­pel, R. (1997). “An Exper­i­ment on the Pure The­ory of Consumer’s Behav­iour.” The Eco­nomic Jour­nal 107 (444): 1431–1444.

I’m sure that dis­prov­ing the the­ory wasn’t Sippel’s orig­i­nal inten­tion. Instead, I sus­pect that he under­took the exper­i­ment to show to his stu­dents that their “indif­fer­ence curves” could be inferred from their pur­chases, as Samuel­son claimed long ago when he dreamed up the con­cept of Revealed Pref­er­ence:

Samuel­son, P. A. (1938). “A Note on the Pure The­ory of Consumer’s Behav­iour.” Eco­nom­ica 5 (17): 61–71.

Instead, Sip­pel found that his exper­i­men­tal sub­jects vio­lated the “Axioms of Revealed Pref­er­ence”.

In the first half of the lec­ture, I cover the axioms of revealed pref­er­ence, and Sippel’s results:

In the sec­ond half, I inter­pret these results using ideas from com­pu­ta­tion the­ory:

About Steve Keen

I am Professor of Economics and Head of Economics, History and Politics at Kingston University London, and a long time critic of conventional economic thought. As well as attacking mainstream thought in Debunking Economics, I am also developing an alternative dynamic approach to economic modelling. The key issue I am tackling here is the prospect for a debt-deflation on the back of the enormous private debts accumulated globally, and our very low rate of inflation.
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  • Steve, do you mind post­ing the pdf/ppt slides as well? Thanks

  • Whoops! For­got that essen­tial step. I’ll edit the post now.

  • sj

    Mr Keen
    I did study eco­nom­ics at West­ern Uni­ver­sity in Camp­bell­town about ten years ago,I decided to give up I was not happy with the neo cab­bage.
    Actu­ally did me a favour I have a far bet­ter under­stand­ing of the mar­ket than most Uni­ver­sity edu­cated clones.
    Brings me to very impor­tant point the finan­cial mar­kets really are a fac­tal and I have prove it.
    If you believe that mar­kets are fac­tal have a crit­i­cal tip­ping point you start to see the mar­ket as a ecosys­tem.
    Every eco sys­tem has a bush fire once in a while to clean out the carbage and this is done by higher inter­est rates.
    You leave inter­est rates too low, cause too much dead wood and brush around.
    You must have pain in a ecosys­tem to keep it healthy,Mr Keen with respect lower inter­est rates just another dead branch in the bush.
    Mr Keen have you seen the bal­ance sheets of the big four banks increase their bor­row­ing lia­bil­i­ties by over 30% in the last three years, so I don’t know how you work out the Aus­tralain house­hold are de lev­e­lag­ing.
    The evi­dence is clear by house price increases that house­holds are tak­ing on MORE DEBT.

    Put another dead branch on the fire to keep the high debt plebes happy.
    God help Aus­tralain if the elite think lower inter­est rates will save us, just ask Japan or Amer­ica.

  • alain­ton

    Will check this out after break­fast just a note on an excel­lent arti­cle on the ‘expan­sion­ary fis­cal con­trac­tion ’ idea — i.e. Alberto Alesina — that gov­ern­ments around the world are now exper­i­ment­ing with — that is aus­ter­ity now will pro­duce pros­per­ity later.

    A study by Goran Hjelm from Sweden’s Insti­tute of Eco­nomic Research said the for­mula only really works when coun­tries can let their cur­ren­cies slide and export their way out of trou­ble. This is not pos­si­ble for Spain and Italy within EMU, nor for the com­bined West at the same time. “We can’t all devalue together and export to Mars,” said Jamie Dannhauser from Lom­bard Street Research.’

  • @Alainton,

    In that sit­u­a­tion they are using the exter­nal sec­tor to absorb the unem­ploy­ment at home caused by a lack of domes­tic con­sump­tion.

    You can see the effects of that with Ger­many. The peg and lack of trans­fer pay­ments within the union exac­er­bates the effects.

    Ger­many has a chronic lack of domes­tic con­sump­tion that shows up as bank­rupt nations in other parts of Europe.

  • alain­ton


    I agree, as well as export­ing peo­ple seek­ing work in the case of aus­ter­ity nations such as Latvia, Ire­land etc.

    China as well in your sce­nario, although the com­par­a­tive advan­tage of China is rapidly erod­ing due to oil con­sump­tion with last year China hav­ing a neg­a­tive bal­ance of pay­ments — an ele­men­tary cal­cu­la­tion shows that China can­not con­tinue to have 8% growth for another decade and have pos­i­tive bal­ance of pay­ments whilst still main­tain­ing its domes­tic petrol con­sump­tion, before then it exhausts its for­eign cur­rency reserves buy­ing increas­ing scarce oil which it is tak­ing a larger and larger global share of. It soon faces an Indone­sia style crunch where cost of oil drags down the econ­omy.

  • mahaish

    at some stage in the next 10 to 15 years that loose peg of the chi­nese is going to get bro­ken me thinks alain­ton,

    for some of the rea­sons you have out­lined

    that might change the dynam­ics a bit, 

    its going to be inter­est­ing , the break­ing of the peg, and the ram­i­fi­ca­tions for the com­mu­nist party and democ­racy in gen­eral in china,

    its quite a debate as to whos cur­rency you would short,

    and i dont buy into this green­back is fin­ished sce­nario,

    the yanks have a legal frame­work , how­ever flawed to back the cur­rency,

    the chi­nese dont,

    you would think re val­u­a­tion upwards of the yuan would be defla­tion­ary for the chi­nese and very infla­tion­ary for the rest of us,

    things couldnt go the other way could it

    should we con­tem­plate cur­rency col­lapse in china, and hyper infla­tion for them ,

    as a con­se­quence of the polit­i­cal col­lapse and tur­moil , when the yaun has to come out and play with­out any­body there to hold its hand.

  • Derek

    Thanks for mak­ing your lec­tures avail­able to the gen­eral pub­lic. I found this one extremely inter­est­ing and I look for­ward to the next.

  • alain­ton


    Yes quite apart from the short term chal­lenges of a prop­erty bub­ble and local gov­ern­ment debt China faces a num­ber of medium term chal­lenges that will get much worse over the next 10 years

    –Reach­ing lim­its of water sup­ply
    –Reach­ing lim­its of cultivation/food sup­ply
    –Expo­nen­tially increas­ing costs of infra­struc­ture as cities expand to 3rd, 4th fifth ring roads
    –Costs of oil imports
    –Age­ing pop­u­la­tion, but rel­a­tively few young peo­ple because of pop­u­la­tion con­trols, leads to worlds high­est pro­jected increase in depen­dency ratio
    –Increas­ing wage costs, reduc­ing advan­tages of low cost man­u­fac­tur­ing
    –End­ing of the money pump from the US, espe­cially if the US defaults or the dol­lar deval­ues
    –With an increas­ingly open soci­ety demands for social expen­di­ture.

    Of course there are many upside risks includ­ing Chi­nas enor­mous entre­pre­neur­ial dynamism, but it is dif­fi­cult to see how a real­is­tic model of 8%+ growth over 20 years could be con­structed. The Chi­nese gov­ern­ment has already knocked it down to 6%.

  • Ramanan

    Re the idea of the gov­ern­ment fix­ing every­thing (com­ing from the Neochar­tal­ists):

    Page 205 here (Page 218 of the pdf), table 24

    says that the RBA used $50 bil­lion of swap lines with the Fed­eral Reserve to ease Aus­tralian banks’ fund­ing pres­sures dur­ing the cri­sis. So the con­jec­ture that gov­ern­ment can fix every­thing is plainly incor­rect.

  • vvadi

    Thanks for shar­ing your lec­tures. I have just fin­ished watch­ing your first lec­ture.
    Your analy­sis on why we can not sim­u­late the demand curve is very sim­i­lar to Mises analy­sis in eco­nomic cal­cu­la­tion prob­lem( ).


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