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Preference reversals: The impact of truth-revealing monetary incentives

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  • Berg, Joyce E.
  • Dickhaut, John W.
  • Rietz, Thomas A.

Abstract

Researchers vigorously debate the impact of incentives in preference reversal experiments. Do incentives alter behavior and generate economically consistent choices? Lichtenstein and Slovic (1971) document inconsistencies (reversals) in revealed preference in gamble pairs across paired choice and individual pricing tasks. The observed pattern is inconsistent with stable underlying preferences expressed with simple errors. Lichtenstein and Slovic (1973) and Grether and Plott (1979) introduce incentives, but aggregate reversal rates change little. These results fostered numerous replications and assertions that models of non-stable preferences are required to explain reversals. Contrary to this research, we find that incentives can generate more economically consistent behavior. Our reevaluation of existing experimental data shows that incentives have a clear impact by better aligning aggregate choices and prices. The effect is sufficiently large that, with truth-revealing incentives, a stable-preferences-with-error model not only explains behavior, but fits the data as well as any model possibly could.

Suggested Citation

  • 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.
    • Handle: RePEc:eee:gamebe:v:68:y:2010:i:2:p:443-468
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