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The “play-out” effect and preference reversals: Evidence for noisy maximization

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

Abstract

In this paper, we document a “play-out” effect in preference reversal experiments. We compare data where preferences are elicited using (1) purely hypothetical gambles, (2) played-out, but unpaid gambles and (3) played-out gambles with truth-revealing monetary payments. We ask whether a model of stable preferences with random errors (e.g., expected utility with errors) can explain the data. The model is strongly rejected in data collected using purely hypothetical gambles. However, simply playing-out the gambles, even in the absence of payments, shifts the data pattern so that noisy maximization is no longer rejected. Inducing risk preferences using a lottery procedure, using monetary incentives or both shift the data pattern further so that noisy maximization achieves the best possible fit to the aggregate data. No model could fit the data better. We argue that play-out shifts the response pattern by inducing value because subjects can use outcomes to “keep score.” Induction or monetary payments create stronger induced values, shifting the pattern further.

Suggested Citation

  • Berg, Joyce E. & Dickhaut, John W. & Rietz, Thomas A., 2013. "The “play-out” effect and preference reversals: Evidence for noisy maximization," Journal of Economic Behavior & Organization, Elsevier, vol. 94(C), pages 160-171.
  • Handle: RePEc:eee:jeborg:v:94:y:2013:i:c:p:160-171
    DOI: 10.1016/j.jebo.2012.09.012
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    References listed on IDEAS

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    More about this item

    Keywords

    Preference reversal; Risky choice; Decision making; Uncertainty;
    All these keywords.

    JEL classification:

    • C91 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Individual Behavior
    • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

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