Lexicographic Preferences

Lexicographic Preferences

BIBLIOGRAPHY

Once behavioral economists took seriously the limited information-processing capacity of the human brain (bounded rationality), they had to replace the neoclassical economic theory of consumer choice. The previous theory assumed additivity—the capacity to weight and add up all of the various features of all goods and thus rank and compare them to maximize utility within one’s budget. Lexicographic preferences are consistent with bounded rationality. Economists conceive of a consumer having a manageable list of product characteristics organized ordinally, like an alphabetized dictionary. Consumers compare products with respect to the highest-ranked characteristic, and if one product is imagined better in that characteristic, the search stops and purchase ensues. If not, the consumer goes on to the next characteristic and repeats the procedure. This requires much less information processing than the additive model. It implies that other product features cannot compensate for failure to qualify on the first priority features. Price can be considered as just another product characteristic, and it may not be at the top of the list.

Theorists such as Peter Earl (1983) added uncertainty considerations to the basic conception without the computational requirements of attaching numerical probabilities to the satisfaction expected from consuming a product. A consumer may conceive of an acceptable gamble beyond which possible gains are not attractive.

Lexicographic preferences have implications for producers. Earl suggests that advertising should be aimed at changing consumers’ priority rankings rather than emphasizing their product’s strong points. If products are comparable with respect to high priority features, it may pay to introduce new product dimensions to meet emerging and created demands ahead of competitors. The theory lends itself to market surveys of yes-no questions rather than complicated sets of numerical tradeoffs.

In modern marketing, firms invest heavily in brand preeminence, perhaps hoping to displace any kind of characteristic comparison, simple or weighted. Further, firms search for how to create an image with which the consumer personally identifies. An emotional trigger that forestalls comparison is the ultimate lexicographic process. People do not necessarily have either probable values attached to products or priority lists for all categories of purchases. Decisions to buy may be formed in the particular case and are description, context, and procedure dependent. Daniel Kahneman (1999) suggests that people imagine an answer to the subjective happiness question on the fly, instead of retrieving preferences from memory. Stores aim to create impulse purchases.

A complementary conception of choice conserving of mental energy involves allocating one’s budget to broad categories of spending all within a total budget constraint. Once the categories are set, there may be little substitution of items from one budget to another. Further, there seems to be a class of products that are pursued initially regardless of cost.

Some economists consider the inability of lexicographic preferences to provide deterministic formal support for the theory of market equilibrium as a drawback, while others were never fascinated with theoretical equilibrium in the first place.

SEE ALSO Choice in Economics; Choice in Psychology; Cognition; Economic Psychology; Economics, Behavioral; Endogenous Preferences; Equilibrium in Economics; Gambling; Happiness; Information, Economics of; Preferences; Preferences, Interdependent; Rationality; Risk; Uncertainty; Utility, Subjective

BIBLIOGRAPHY

Earl, Peter E. 1983. The Economic Imagination: Towards a Behavioural Analysis of Choice. Brighton, U.K.: Wheatsheaf.

Kahneman, Daniel. 1999. Objective Happiness. In Well-Being: The Foundations of Hedonic Psychology, eds. Daniel Kahneman, Ed Diener, and Norbert Schwarz, 3–25. New York: Russell Sage Foundation.

Thaler, Richard H. 1985. Mental Accounting and Consumer Choice. Marketing Science 4 (3): 199–214.

A. Allan Schmid