Stated Preferences Vs Revealed Preferences

“I’d love to be able to play the guitar.

“I wish I was slimmer.”

“I should pay more tax.”

How many times have we heard statements like these? Too many to count, I’d wager. In fact, you probably rolled your eyes when you read them. You’re sure to recognise such statements for what they are: nonsense.

If someone really wanted to play the guitar, they could. It would take lots of time and effort, but it’s possible. The same with losing weight. Paying tax is the easiest of all, you can simply donate to the treasury (not that many people do).

The point is that people say these things when all evidence suggests that they don’t really mean them. That’s why there is a specific term for these kinds of statements. Economists call them “stated preferences”. If someone says they want to do something, that’s a stated preference.

Handily, there’s also a term for the things people actually do. Economists call these “revealed preferences”. A stated preference might be someone saying that they’d love to be able to draw. However, their revealed preferences show that they don’t spend any time doing so, which would indicate that they don’t really mean what they say. This is the difference between a stated and a revealed preference.

Now, any economist worth their salt will always ignore, when possible, stated preferences. There will be some occasions when stated preferences are all that exist. For example, if revealed preferences are skewed by the law like they are in illegal drugs, but for the vast majority of the time, revealed preferences are the ones to look at.

Unfortunately, these days this is not usually the case. Most economists tend to be left leaning, Keynesian ideologues. People who want to do something. Sadly, the sorts of people who recognise that people can run their own lives better than anyone else rarely choose professions like economist. Or politician. This being the case, there is a tendency for most economists to ignore revealed preferences and just go by what people say, as that enables them to do what they want: interfere with things.

Take the recent sugar tax in drinks. Plenty of surveys were cited, stating people want to decrease the amount of sugar in their diets. So tell me, what was stopping them? Sugar free diet drinks have been available for decades. Why not drink those if you want to cut down? I love Coca-Cola. It’s a guilty pleasure. I rarely drink it as I like to keep in shape (which isn’t as easy now I’m in my forties), but every now and again I like to sip from a bottle of ice cold coke. Why should I be taxed more? More importantly, why should people who suffer from diabetes be taxed more when sugar can be life saving for them?

It’s the same with tax. I’ve seen so many surveys where people state that they should pay more tax. Well, why don’t they? I made an FOI request recently and received information back about how much money people voluntarily donate to the state. I discuss it in a recent podcast but, spoiler alert, it’s virtually nothing.

The Germans have a fantastic word that springs to mind: verschlimmbessern. It roughly translates as “the act of making something worse whilst trying to make it better”. This is what happens when economists and politicians look at stated preferences instead of revealed preferences, when they look at feelings instead of facts, and when something that sounds good to them takes precedence over something that has been proven to work.

Go back to the first few statements at the beginning of this article then ask yourself: Do we really want to base government policy on what people say?