Preference Formation, Choice Sets, and the Creative Destruction of Preferences

Economic models of human decision making — maximizing utility subject to the constraints imposed by scarcity — are founded in the idea of taking each person’s preferences (the weights that appear in the person’s utility function) as both known to the individual and given. This paper explores the idea of the evolution of personal preferences, or values, within a context of both entrepreneurial discovery and Objectivist philosophy. The paper begins by attempting to formalize, mathematically, Ayn Rand’s theory of Objectivism applied to human values and preferences. It continues by modeling the process of preferences changes in a manner similar to Schumpeter’s theory of creative destruction within the marketplace, similar to the entrepreneurial trial and error process of discovery — but here meaning a process of self-discovery. The paper next examines the role of cultural and societal factors, and endogenous group membership selection, in forming shared preference sets across individuals. Finally, the paper discusses the difference between active choice sets and the set of all possible goods available for consumption, and describes how the strength of human preferences are used to narrow choice sets in the presence of greater consumption options