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Preference reversals and probabilistic choice

Author

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  • Pavlo R. Blavatskyy

Abstract

Preference reversals occur when different (but formally equivalent) elicitation methods reveal conflicting preferences over two alternatives. This paper shows that when people have fuzzy preferences i.e. when they choose in a probabilistic manner, their observed decisions can generate systematic preference reversals. A simple model of probabilistic choice and valuation can account for a higher incidence of standard (nonstandard) preference reversals for certainty (probability) equivalents and it can also rationalize the existence of strong reversals. An important methodological contribution of the paper is a new definition of a probabilistic certainty/probability equivalent of a risky lottery.

Suggested Citation

  • Pavlo R. Blavatskyy, 2008. "Preference reversals and probabilistic choice," IEW - Working Papers 383, Institute for Empirical Research in Economics - University of Zurich.
    • Handle: RePEc:zur:iewwpx:383
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    File URL: https://www.econ.uzh.ch/apps/workingpapers/wp/iewwp383.pdf
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    More about this item

    Keywords

    Preference reversal; probabilistic choice; certainty equivalent; probability equivalent; valuation;
    All these keywords.

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • D80 - Microeconomics - - Information, Knowledge, and Uncertainty - - - General
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior

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