Definition of Revealed preference

Pioneered by American economist Paul Samuelson (1915- ), revealed preference theory is a method by which it is possible to discern the best possible option on the basis of consumer behaviour. Essentially, this means that the preferences of consumers can be revealed by their purchasing habits. Revealed preference theory came about because the theories of consumer demand were based on a diminishing marginal rate of substitution. This diminishing MRS is based on the assumption that consumers make consumption decisions based on their intent to maximize their utility. While utility maximization was not a controversial assumption, the underlying utility functions could not be measured with great certainty. Revealed preference theory was a means to reconcile demand theory by creating a means to define utility functions by observing behavior.