Preference Reversals

Abstract

Preference reversal is an experimentally observed phenomenon in which subjects, when asked to choose between suitably matched pairs of lotteries and then to state the lowest amount of money they would be willing to accept in exchange for the right to participate in each of these lotteries, announce the lowest amount for the chosen lottery. Preference reversals were first reported by Lichtenstein and Slovic (1971) and have since been replicated in numerous studies, for example Lindman (1971), Grether and Plott (1979), Pommerehne, Schneider and Zweifel (1982), Reilly (1982). The latter studies introduce variations in the experimental design to increase the motivation and reduce the possibility of confusion and errors on the part of the subjects. This experimental evidence seems inconsistent with transitive preferences and, consequently, with any theory of decision making under risk based on such preferences. Recently, however, Karni and Safra (1986) and Holt (1986) demonstrated that preference reversals may occur even when preferences are transitive, and that the preference reversal phenomenon may be the result of the interaction between the subjects’ preferences and the experimental design. According to this interpretation, preference reversals constitute a violation of the independence axiom of expected utility theory.