The Umbrella Hypothesis

The Umbrella Hypothesis

by Mindan, Yanni, Jiayi and Syeda

The concept of revealed preferences provides economists with an idea of consumer demand. However, the theory can be applied only so far as consumer preferences and behavior remain unchanged. So how often do consumer’s preferences change and how well can we record these changes in order for revealed preferences to be effectively applied to predict consumer behavior? Our “Umbrella Theory” may help explicate the answers.

Let us assume that stealing of a good, U (or temporarily borrowing of the good without informing the owner with intentions to return it eventually), is the same action as consumption of the good U; in which case both stealing/borrowing and consumption reveal preferences. Let that good U be an umbrella. For the sake of simple microeconomic analysis, let there be a second good, P, and you can assume it is an iPhone. Now, imagine it is a bright sunny day with a cheerful weather forecast. Imagine further that you did not check the forecast in a hurry in the morning and carried out with you a stylish clear plastic umbrella. If you were to leave it or forget it anywhere on campus, you need not fear that it will be taken by anyone because no one will have a use for an umbrella in dry weather. Everyone will prefer P to U. However, this being New England, suppose it starts raining suddenly in the afternoon and you are one of the lucky few in possession of an umbrella. In such a scenario, would you feel safe leaving your umbrella lying around just about anywhere? We guess you would not. We think this is a great example of how suddenly and swiftly consumers’ preferences change and thus the application of our model needs to change as well.

You might be wondering why P is an iPhone and thinking to yourself that even if it is raining and someone is in need of an umbrella, that someone might still prefer P to U because P is worth more in monetary terms than U in all circumstances. Here, we would like to share a personal experience of one of our teammates. She lost her umbrella twice on campus. She returned to not find it in the library entrance lobby once and the other time it disappeared from Blanchard. However, she lost her iPhone three times on campus, once at a public fair, and each time she was called to be informed where she could pick up her phone. This leads us to believe that maybe the utility which leads to preferences for an object is derived more from how useful that object is at the given circumstance and not how valuable it is. However, as Professor Schmeiser pointed out, it might be the case that iPhones are returned because they are expensive and people who could take it would feel guiltier because of it, whereas an umbrella is not so expensive and the “guilt content” is significantly lesser and can be justified by a pressing need for an umbrella in that circumstance.

Whatever the counter-arguments might be, this umbrella-iPhone market is surely an interesting ground for the study of consumer preferences. If we reasonably assume that both are normal goods which have a CED=0 because they are unrelated, it is interesting to observe that despite the monetary value of the iPhone being higher than that of an umbrella, it is not “preferred” over an umbrella (through stealing or borrowing), under all circumstances; whereas even though the umbrella is cheaper it may be preferred more than an iPhone if it is raining and the consumer does not possess an umbrella; or even when it is not raining and a thief-by-nature steals the umbrella instead of the iPhone due to a lower guilt-content. In all circumstances here, the axiom of revealed preferences seems to hold!