Preference (economics)

In economics and other social sciences, preference is the ordering of alternatives based on their relative utility, a process which results in an optimal "choice" (whether real or theoretical). The character of the individual preferences is determined purely by taste factors, independent of considerations of prices, income, or availability of goods.

With the help of the scientific method many practical decisions of life can be modelled, resulting in testable predictions about human behavior. Although economists are usually not interested in the underlying causes of the preferences in themselves, they are interested in the theory of choice because it serves as a background for empirical demand analysis.

In 1926 Ragnar Frisch developed for the first time a mathematical model of preferences in the context of economic demand and utility functions. Up to then, economists had developed an elaborated theory of demand that omitted primitive characteristics of people. This omission ceased when, at the end of the 19th and the beginning of the 20th century, logical positivism predicated the need of theoretical concepts to be related with observables. Whereas economists in the 18th and 19th centuries felt comfortable theorizing about utility, with the advent of logical positivism in the 20th century, they felt that it needed more of an empirical structure. Because binary choices are directly observable, it instantly appealed to economists. The search for observables in microeconomics is taken even further by revealed preference theory.

Since the pioneer efforts of Frisch in the 1920s, one of the major issues which has pervaded the theory of preferences is the representability of a preference structure with a real-valued function. This has been achieved by mapping it to the mathematical index called utility. Von Neumann and Morgenstern 1944 book "Games and Economic Behaviour" treated preferences as a formal relation whose properties can be stated axiomatically. These type of axiomatic handling of preferences soon began to influence other economists: Marschak adopted it by 1950, Houthakker employed it in a 1950 paper, and Kenneth Arrow perfected it in his 1951 book "Social Choice and Individual Values".

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