The Money Pump as a Measure of Revealed Preference Violations

We introduce a measure of the severity of violations of the revealed preference axioms, which we call the money pump index (MPI). The measure is based on the idea that a consumer who violates the axioms is subject to being exploited as a money pump. The MPI has a simple interpretation as the certain dollar amount that can be extracted from a consumer who behaves irrationally. We carry out an empirical application, using a panel data set of food expenditures. We find a large number of violations of the revealed preference axioms. On average, however, the MPI calculated for these violations is small, suggesting that the violations of revealed preference are not severe. Formal statistical testing indicates that the hypothesis of consumer rationality cannot be rejected.