Indifference or indecisiveness? Choice-theoretic foundations of incomplete preferences

A commonly held belief in economics is that an individual's preferences that are revealed by her choices must be complete. This paper takes issue with this position by showing that one may be able to distinguish between indifference and indecisiveness of an agent upon observing her choice behavior. We relax the standard Weak Axiom of Revealed Preferences (WARP) and show that a potent theory of individual choice (with and without risk) can be founded on this weaker axiom when it is coupled with some other standard postulates. The most notable features here are that an agent is allowed to be indifferent between certain alternatives and indecisive about others. Moreover, an outside observer can identify which of these actually occur upon examining the (observable) choice behavior of the decision maker. As an application, we also show how our theory may be able to cope with the classical preference reversal phenomenon. (c) 2006 Elsevier Inc. All rights reserved.