Lecture 1: Preference Relations and Revealed Preference (based

on “Notes on the Theory of Choice by David Kreps)

The subject matter of this lecture is the introduction to the axiomatic development of single-person
choice theory, also known as decision theory and preference theory. An individual whom we will
call rational economic person has preferences that are described by a binary relation  which
stands for “strict preference”.

Binary Relations
For a given set X, let X × X denote the usual Cartesian product of all ordered pairs (x, y), where
both x and y are from X.
A binary relation B on the set X is formally defined as a subset of X × X- write B ⊆ X × X,
and (x, y) ∈ B if the ordered pair (x, y) is in the relation B. Another, quicker way to write
(x, y) ∈ B is xBy, which can be read as “x stands in the relation B to y.” If (x, y) ∈ / B, I will
write “not xBy” or “xB̃y”.

Example 1. Consider following binary relations:

(a) Let X = {1, 2, 3} and B = {(1, 1), (1, 2), (1, 3), (2, 3), (3, 1)}.
(b) Let X=all people in the world and let B be the relation “shares at least one given name
with.”
(c) Let X = R (the real line) and let B be the relation “greater than or equal to”; that is,
B =≥.
(d) Let X = R and let B be the relation: xBy if | x − y |> 1.
(e) Let X = R and let B be the relation: xBy if (x − y) is an integer multiple of 2.

There is a long list of properties that a given binary relation might or might not have. The
properties that will be important in this lecture are the following.

Definition 1. A binary relation B on a set X is

reflexive if xBx for all x ∈ B;
irreflexive if xB̃x for all x ∈ B;
symmetric if xBy implies yBx;
asymmetric if xBy implies y B̃x;
antisymmetric if xBy and yBx imply x = y;
transitive if xBy and yBz imply xBz;
negatively transitive if xB̃y and y B̃z imply xB̃z;
complete ( or connected) if for all x, y ∈ X, xBy or yBx (or both)
weakly connected if x = y or xBy or yBx;
acyclic if x1 Bx2 , x2 Bx3 , ...,xn−1 Bxn imply x1 6= xn .

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 In Example 1 above, the binary relation in part (a) is weakly connected, but nothing else;
the one in (b) is reflexive and symmetric; the one in (c) is reflexive, antisymmetric, transitive,
negatively transitive, complete, and weakly connected; the one in (d) is irreflexive and symmetric;
the one in (e) is reflexive, symmetric and transitive.

Preference Relation
In this section, we take up the following simple story. There is a set of items X, and our rational
economic agent is willing to express his preferences among these items by making paired compar-
isons of the form: “I strictly prefer x to y” which is written as x  y. Strict preference is a binary
relation on X. Consider the following properties that this binary relation might possess:
(a) Asymmetry : If x is strictly preferred to y, then y is not strictly preferred to x.
(b) Transitivity : If x is strictly preferred to y and y is strictly preferred to z, then x is strictly
preferred to z.
(c) Irreflexivity : No x is strictly preferred to itself.
(d) Negative transitivity : If x is not strictly preferred to y, and y is not strictly preferred to z,
then x is not strictly preferred to z.
Negative transitivity is a hard property to deal with intuitively in the given form. We can
develop an alternative statement that is completely equivalent.

Lemma 1. A binary relation B is negatively transitive iff (if and only if ) xBz implies that, for
all y ∈ X, xBy or yBz.

Proof. [{xBz} implies {xBy or yBz for all y ∈ X}] is the same as [{not (xBy or yBz for all
y ∈ X)} implies {not xBz}] which is [{there exists y ∈ X with xB̃y and y B̃z} implies {xB̃z}],
which is negative transitivity.

Now back to . Is negative transitivity reasonable? Is it reasonable to say that if x is strictly

preferred to z, then for all y either x is strictly preferred to y or y is strictly preferred to z? As a
normative property, it might be (barely) reasonable. But as a descriptive property, it might not be
reasonable. Consider the following example: Suppose X = (0, ∞)×(0, ∞), where x = (x1 , x2 ) ∈ X
is interpreted as the commodity bundle x1 bottles of beer and x2 bottles of wine. Our rational
economic agent would certainly say that (10, 10)  (9, 9). But consider (15, 6). He might not be
willing to say either that (10, 10)  (15, 6) or (15, 6)  (9, 9). He might plead that comparisons
called for are too difficult for him to make.
Despite these difficulties with negative transitivity, it is standard to proceed assuming that 
is asymmetric and negatively transitive.

Definition 2. A binary relation  on a set X is called preference relation if it is asymmetric and

negatively transitive.

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Proposition 1. If  is a preference relation, then  is irreflexive, transitive and acyclic.

Proof. Asymmetry directly implies irreflexivity.

Suppose x  y and y  z. By negative transitivity, x  y implies that either z  y or x  z.
But z  y is impossible because y  z is assumed and  is asymmetric. Thus, x  z, which is
negative transitivity.
If x1  x2 ,x2  x3 ,...,xn−1  xn , then by transitivity x1  xn . Since  is irreflexive, this
implies x1 6= xn . Thus,  is acyclic.

Constructing Weak Preference and Indifference

When we are given a binary relation  that express strict preference, we use it to define two other
binary relations:
x  y if y  x, and
x ∼ y if x  y and y  x, where we are using  as shorthand for  ˜ or for “not ”.
The relation  is called weak preference, although it really expresses the absence of strict
preference. The relation ∼ is called indifference and it expresses the absence of strict preference
in either direction, which is perhaps not quite the same thing as active indifference.

Proposition 2. If  is a preference relation, then:

(a) For all x and y, exactly one of x  y, y  x or x ∼ y holds.
(b)  is complete and transitive.
(c) ∼ is reflexive, symmetric, and transitive.
(d) w  x, x ∼ y, y  z imply w  y and x  z.
(e) x  y iff x  y or x ∼ y.
(f ) x  y and y  x imply x ∼ y.

Proof. (a) follows from the definition of ∼ and the fact that  is asymmetric.
(b) By the asymmetry of , either x  y or y  x (or both) for all x and y, thus  is complete.
For transitivity of , note that this follows immediately from the negative transitivity of .
(c) ∼ is reflexive because  is not reflexive. ∼ is symmetric because the definition of ∼ is
symmetric. For transitivity, suppose x ∼ y ∼ z. Then, x  y  z and z  y  x. By negative
transitivity of , x  z  x, or x ∼ z.
(d) If w  x ∼ y, then by part (a) one of w  y, or y ∼ w, or y  w hold. But y  w is
impossible, since then transitivity of  would imply y  x. And y ∼ w is impossible, since then
transitivity of ∼ would imply x ∼ w, contradicting w  x. Thus w  y must hold. The other part
is done similarly.
(e) x  y iff y  x iff x  y or x ∼ y by part (a).
(f) This is immediate from the definitions of  and ∼.

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 Note well the plot: Our rational economic agent expresses strict preferences, from which we
define weak preferences and indifferences. It is strict preferences that is basic, i.e., our rational
economic agent is not being called upon to express any judgements concerning weak preference or
indifference, and he might disagree with our use of those terms to describe the negation of strict
preference.
Another possible plot would be to ask our rational economic agent to express weak preferences or
preferences with indifference. That is, the basic relation is . This is a plot that is followed in many
developments of choice theory, and in the standard treatment it leads to the same mathematical
results:
0 0
Proposition 3. Given a binary relation  on a set X, define two new binary relations  and
0 0
∼ from  by

0 0 0 0 0
x y if y  x, and x∼ y if x y and y  x.
0 0
Then if  is complete and transitive,  will be a preference relation. Moreover, if we start
0 0 0 0 0
with a binary relation  , define  and ∼ as above from  , and then define  and ∼ from  by

0 0 0
xy if y  x, and x∼y if y x and x  y,
0 0
then  and  will agree, as will ∼ and ∼.

The proof is left as an exercise. So, it does not matter whether we start with a strict preference
relation that is asymmetric and negatively transitive or with a weak preference relation that is
complete and transitive-we end up in the same place.

Revealed Preference Theory

So far, the story was that our rational economic agent was making paired comparisons between
items in X. But especially from a descriptive point of view, we would like to start with an even more
basic concept-that of choice made rather than preferences expressed. That is, from a descriptive
point of view what we see is an individual’s choice behavior- we have to connect that behavior
as best we can with his preferences which are never directly expressed. The individual’s choice
behavior reveals his preferences, hence the name of this subject: revealed preference theory. This
subject has also some normative justifications- taking preferences as given, how should choices be
made? But this subject is of greatest interest from the descriptive viewpoint.
To keep matters simple, throughout we will assume that the choice set X is finite. Especially
if the applications you are thinking of is demand for consumption bundles or for any item that is
infinitely divisible, this is not a very nice simplification. For nonempty subsets of X, we will use
notation such as A,B, etc. The set of all nonempty subsets of X will be denoted by P(X).

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Definition 3. A choice function for a (finite) set X is a function C : P (X) → P (X) such that for
all A ⊆ X, C(A) ⊆ A.

The interpretation is: If our rational economic agent is offered his choice of anything in the set
A, he says that any member of C(A) will do just fine.
If our rational economic agent’s preferences are given by the binary relation  (and by the
corresponding  and ∼), it is natural to suppose that he chooses according to the rule that from
a set A, anything that is undominated will be okay. In symbols, define a function C(·, ) by

C(A, ) = {x ∈ A : ∀y ∈ A, y  x}.

It is clear that for any , C(A, ) ⊆ A, but it is not clear whether C(A, ) 6= ∅. Thus it is
not clear that C(·, ) is a choice function. That will be something to be investigated.
The other questions to be looked at here are :
(a) From the normative point of view: Given a relation  (not necessarily a preference relation),
when is C(·, ) a choice function? If it is a preference relation, what properties does C(·, ) have?
(b) From the descriptive point of view: Given a choice function C, when is there a binary
relation  such that C(·) = C(·, )? When is this binary relation a preference relation? (This last
question is the critical one, as we are going to be building models where individuals are assumed
to be maximizing their preferences according to some preference relation.)

Proposition 4. If a binary relation  is acyclic, then C(·, ) is a choice function.

Proof. We need to show that for all A ∈ P (X), the set

C(A, ) = {x ∈ A : ∀y ∈ A, y  x},

is nonempty. Suppose it was empty. Then, for each x ∈ A there exists a y ∈ A such that y  x.
Pick x1 ∈ A (A is nonempty), and let x2 be such that x2  x1 . Let x3 be such that x3  x2 , and
so on. In other words, x1 , x2 , x3 , ... is a sequence of elements of A where

...xn  xn−1  ...  x2  x1 .

Because A is finite, there must exist some m and n such that xm = xn and m > n. But this
would be a cycle, and  is assumed to be acyclic. This is a contradiction. Hence, the necessary
condition is established.

Note the instant corollary: If  is a preference relation, then C(·, ) is a choice function. Also,
we can strengthen the Proposition 4 as follows:

Proposition 5. For any binary relation , C(·, ) is a choice function iff  is acyclic.

Proving this is left as an exercise.

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Some Properties of Choice Functions
The classic axiomatic property of a choice is Houthakker’s axiom of revealed preference.
Houthakker’s axiom: If x and y are both in A and B and if x ∈ C(A) and y ∈ C(B), then
x ∈ C(B).
In words, if x is sometimes chosen (from A) when y is available, then whenever y is chosen and
x is available, x is also chosen.
Houthakker’s axiom is broken into two pieces by Sen:
Sen’s property α: If x ∈ B ⊆ A and x ∈ C(A), then x ∈ C(B).
Sen’s property β: If x, y ∈ C(A), and A ⊆ B and y ∈ C(B), then x ∈ C(B).
Note that Houthakker’s axiom concerns A and B such that x, y ∈ A ∩ B. Property α specializes
to the case B ⊆ A. Property α is sometimes referred to as Independence of Irrelevant Alternatives,
the idea being that the choice out of a larger set of options does not change when some of the
unchosen, irrelevant alternatives in the set are removed.

Proposition 6. For an arbitrary binary relation , C(·, ) satisfies Sen’s property α.

The proof is left as an exercise. It is interesting that even if  is acyclic, C(·, ) may fail to
satisfy property β. Providing an example makes a good homework exercise.

Proposition 7. If  is a preference relation, then C(·, ) satisfies Houthakker’s axiom, hence

both Sen’s α and Sen’s β.

Proof. Suppose x and y are in both A and B, x ∈ C(A, ) and y ∈ C(B, ). Since x ∈ C(A, )
and y ∈ A, we have that y  x. Since y ∈ C(B, ), we have that for all z ∈ B, z  y. Thus, by
negative transitivity of , for all z ∈ B it follows that z  x. This implies x ∈ C(B, ).

Question: In the proof we seemingly only used the negative transitivity of . Does this mean
that C(·, ) satisfies Houthakker’s axiom whenever  is negatively transitive?

Proposition 8. If a choice function C satisfies both properties α and β, then there exists a pref-
erence relation  such that C(·) = C(·, ).

Before proving this, note that it combines with Proposition 7 to imply that if a choice function
C satisfies Sen’s α and β, then it also satisfies Houthakker’s axiom. Also, since we did not use the
asymmetry in the proof of Proposition 7, it seems to imply that negative transitivity of  implies
that  satisfies asymmetry. Or does it?

Proof. Define  as follows:

xy if x 6= y and C({x, y}) = {x}.

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 The relation  so defined is obviously asymmetric. We need to check that this relation is
negatively transitive, and that C(A, ) = C(A) for all sets A. We will the latter first.
Fix a set A.
(a) If x ∈ C(A), then for all z ∈ A, z  x. For if z  x, then C({x, z} = {z}, contradicting
property α. Thus, x ∈ C(A, ).
(b) If x ∈
/ C(A), then let z be chosen arbitrarily from C(A). We claim that C({z, x}) = {z}-
otherwise, β property would be violated. Thus, z  x and x ∈ / C(A, ).
Combining (a) and (b), C(A) = C(A, ) for all A.
Finally, to prove negative transitivity of , suppose that x  y and y  z, but x  z. Note
that x  z implies that {x} = C({x, z}), thus z ∈ / C({x, y, z} by property α. Since z ∈ C({y, z}),
this implies y ∈
/ C({x, y, z}) by property α. Since y ∈ C({x, y}), implies x ∈/ C({x, y, z}). As C(·)
is a choice function, this is not possible. Contradiction. Hence,  is negatively transitive.

Propositions 7 and 8 are exact converses.

Summary of Results
(1) There exists a preference relation  such that C(·) = C(·, ) if and only if C(·) satisfies
Houthakker’s axiom if and only if C(·) satisfies Sen’s α and β.
(2) A binary relation  is acyclic if and only if there exists a choice function C(·) = C(·, ) for
 which implies that, but is not implied by C(·) satisfies Sen’s α, and none of the previous three
imply or implied by C(·) satisfies Sen’s β.