Random choice and market demand

Abstract

AbstractThis paper examines a statistical model of choice in which individual decisions have no preferential basis or optimizing behaviour. Individual consumption is chosen at random, while respecting a linear budget set. All the properties of classical demand theory, including symmetry and negative (semi)definiteness of the Slutsky matrix, are shown to be generally satisfied by mean (i.e., market) demands. Despite the fact that individuals are “irrational,” mean demands can be rationalized as the outcome of utility‐maximizing behaviour, even when demands are interior. The severity and frequency of revealed preference violations are unable to reject economic rationality in irrational individuals.