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Imprecision as an Account of the Preference Reversal Phenomenon

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  • David J. Butler
  • Graham C. Loomes

Abstract

Many individuals' choices and valuations involve a degree of uncertainty/imprecision. This paper reports an experiment designed to obtain some measure of imprecision and to examine the extent to which it can explain preference reversals of two opposite forms, one of which appears not to have been reported previously. The model of imprecision we examine not only predicts both patterns but also provides an account of earlier results that are otherwise not well explained. The results suggest that any successful descriptive theory of choice and valuation will need to allow in some way for the imprecision surrounding people's decisions. (JEL C91, D11, D81)

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Bibliographic Info

Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 97 (2007)
Issue (Month): 1 (March)
Pages: 277-297

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Handle: RePEc:aea:aecrev:v:97:y:2007:i:1:p:277-297

Note: DOI: 10.1257/aer.97.1.277
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References

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  1. Loomes, G. & Moffatt, P.G. & Sugden, R., 1998. "A Microeconometric Test of Alternative Stochastic Theories of Risky Choice," University of East Anglia Discussion Papers in Economics 9806, School of Economics, University of East Anglia, Norwich, UK..
  2. Seidl, Christian, 2002. " Preference Reversal," Journal of Economic Surveys, Wiley Blackwell, vol. 16(5), pages 621-55, December.
  3. Loomes, Graham & Sugden, Robert, 1998. "Testing Different Stochastic Specifications of Risky Choice," Economica, London School of Economics and Political Science, vol. 65(260), pages 581-98, November.
  4. Rubinstein, Ariel, 1988. "Similarity and decision-making under risk (is there a utility theory resolution to the Allais paradox?)," Journal of Economic Theory, Elsevier, vol. 46(1), pages 145-153, October.
  5. Robin P. Cubitt & Alistair Munro & Chris Starmer, 2004. "Testing explanations of preference reversal," Economic Journal, Royal Economic Society, vol. 114(497), pages 709-726, 07.
  6. Hey, John D & Orme, Chris, 1994. "Investigating Generalizations of Expected Utility Theory Using Experimental Data," Econometrica, Econometric Society, vol. 62(6), pages 1291-1326, November.
  7. Dubourg, W R & Jones-Lee, M W & Loomes, Graham, 1997. "Imprecise Preferences and Survey Design in Contingent Valuation," Economica, London School of Economics and Political Science, vol. 64(256), pages 681-702, November.
  8. Eliaz, Kfir & Ok, Efe A., 2006. "Indifference or indecisiveness? Choice-theoretic foundations of incomplete preferences," Games and Economic Behavior, Elsevier, vol. 56(1), pages 61-86, July.
  9. Graham Loomes, 2005. "Modelling the Stochastic Component of Behaviour in Experiments: Some Issues for the Interpretation of Data," Experimental Economics, Springer, vol. 8(4), pages 301-323, December.
  10. Ulrich Schmidt & John D. Hey, 2004. "Are Preference Reversals Errors? An Experimental Investigation," Journal of Risk and Uncertainty, Springer, vol. 29(3), pages 207-218, December.
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Citations

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Cited by:
  1. Graham Loomes & Chris Starmer & Robert Sugden, 2007. "Preference reversals and disparities between willingness to pay and willingness to accept in repeated markets," Discussion Papers 2007-10, The Centre for Decision Research and Experimental Economics, School of Economics, University of Nottingham.
  2. Graham Loomes & Shepley Orr & Robert Sugden, 2009. "Taste uncertainty and status quo effects in consumer choice," Journal of Risk and Uncertainty, Springer, vol. 39(2), pages 113-135, October.
  3. Graham Loomes, 2005. "Modelling the Stochastic Component of Behaviour in Experiments: Some Issues for the Interpretation of Data," Experimental Economics, Springer, vol. 8(4), pages 301-323, December.
  4. Bleichrodt, Han & Filko, Martin, 2008. "New tests of QALYs when health varies over time," Journal of Health Economics, Elsevier, vol. 27(5), pages 1237-1249, September.
  5. Drew Fudenberg & David K. Levine & Zacharias Maniadis, 2012. "On the Robustness of Anchoring Effects in WTP and WTA Experiments," American Economic Journal: Microeconomics, American Economic Association, vol. 4(2), pages 131-45, May.
  6. Andrea Isoni & Peter Brooks & Graham Loomes & Robert Sugden, 2011. "Do markets reveal preferences - or shape them?," Working Paper series, University of East Anglia, Centre for Behavioural and Experimental Social Science (CBESS) 11-03, School of Economics, University of East Anglia, Norwich, UK..
  7. Eike B. Kroll & Bodo Vogt, 2008. "The Relevance of Irrelevant Alternatives: An experimental investigation of risky choices," FEMM Working Papers 08028, Otto-von-Guericke University Magdeburg, Faculty of Economics and Management.
  8. Joyce E Berg & John W Dickhaut & Thomas A Rietz, 2004. "Preference Reversals: The Impact of Truth-Revealing Incentives," Levine's Bibliography 122247000000000571, UCLA Department of Economics.
  9. David Hendry, 2010. "Climate Change: Lessons for our Future from the Distant Past," Economics Series Working Papers 485, University of Oxford, Department of Economics.
  10. Berg, Joyce E. & Dickhaut, John W. & Rietz, Thomas A., 2010. "Preference reversals: The impact of truth-revealing monetary incentives," Games and Economic Behavior, Elsevier, vol. 68(2), pages 443-468, March.
  11. Pavlo Blavatskyy, 2009. "Preference reversals and probabilistic decisions," Journal of Risk and Uncertainty, Springer, vol. 39(3), pages 237-250, December.
  12. Butler, David & Loomes, Graham, 2011. "Imprecision as an account of violations of independence and betweenness," Journal of Economic Behavior & Organization, Elsevier, vol. 80(3), pages 511-522.
  13. Pavlo Blavatskyy, 2010. "Reverse common ratio effect," Journal of Risk and Uncertainty, Springer, vol. 40(3), pages 219-241, June.
  14. Graham Loomes & José Luis Pinto-Prades & Jose Maria Abellan-Perpinan & Eva Rodriguez-Miguez, 2010. "Modelling Noise and Imprecision in Individual Decisions," Working Papers 10.03, Universidad Pablo de Olavide, Department of Economics.
  15. Aurora García-Gallego & Nikolaos Georgantzís & Daniel Navarro-Martínez & Gerardo Sabater-Grande, 2011. "The stochastic component in choice and regression to the mean," Theory and Decision, Springer, vol. 71(2), pages 251-267, August.

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