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Are Preference Reversals Errors? An Experimental Investigation

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  • Ulrich Schmidt
  • John D. Hey

Abstract

This paper investigates whether some part of the preference reversal phenomenon can be attributed to errors in the responses of subjects in experiments. Such errors have been well documented in other investigations of behaviour in risky decision problems, but their relevance to the preference reversal phenomenon has not been explored. Building on earlier work, we develop an extended error model and apply it to the results of an experiment in which subjects tackle risky choice problems on five separate occasions. In this experiment subjects had to answer choice questions in three occasions and to state selling and buying prices in the remaining two occasions. Our results indicate that scale compatibility can be ruled out as a significant sole explanation of the preference reversal phenomenon. Moreover, we can show that a considerable fraction of observed preference reversals can be classified as pricing errors, whereas choice errors turn out to play a minor role.

Suggested Citation

  • 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.
  • Handle: RePEc:kap:jrisku:v:29:y:2004:i:3:p:207-218
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    Cited by:

    1. John Hey & Andrea Morone & Ulrich Schmidt, 2009. "Noise and bias in eliciting preferences," Journal of Risk and Uncertainty, Springer, vol. 39(3), pages 213-235, December.
    2. Birnbaum, Michael H. & Schmidt, Ulrich, 2010. "Allais paradoxes can be reversed by presenting choices in canonical split form," Kiel Working Papers 1615, Kiel Institute for the World Economy (IfW Kiel).
    3. Pavlo Blavatskyy, 2012. "Probabilistic choice and stochastic dominance," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 50(1), pages 59-83, May.
    4. Raúl López-Pérez & Eli Spiegelman, 2020. "Using Eye-Tracking Techniques To Understand The Role Of Attention On Choice And Reversals," Working Papers 2001, Instituto de Políticas y Bienes Públicos (IPP), CSIC.
    5. Carlos Alós-Ferrer & Alexander Jaudas & Alexander Ritschel, 2021. "Attentional shifts and preference reversals: An eye-tracking study," Judgment and Decision Making, Society for Judgment and Decision Making, vol. 16(1), pages 57-93, January.
    6. Michael H. Birnbaum & Ulrich Schmidt & Miriam D. Schneider, 2017. "Testing independence conditions in the presence of errors and splitting effects," Journal of Risk and Uncertainty, Springer, vol. 54(1), pages 61-85, February.
    7. Ulrich Schmidt & Chris Starmer & Robert Sugden, 2008. "Third-generation prospect theory," Journal of Risk and Uncertainty, Springer, vol. 36(3), pages 203-223, June.
    8. Carlos Alós-Ferrer & Alexander Ritschel, 2022. "Attention and salience in preference reversals," Experimental Economics, Springer;Economic Science Association, vol. 25(3), pages 1024-1051, June.
    9. Johannes G. Jaspersen, 2016. "Hypothetical Surveys And Experimental Studies Of Insurance Demand: A Review," Journal of Risk & Insurance, The American Risk and Insurance Association, vol. 83(1), pages 217-255, January.
    10. Anna Maffioletti & Ulrich Schmidt & Carsten Schröder, 2009. "The effect of elicitation methods on ambiguity aversion: an experimental investigation," Economics Bulletin, AccessEcon, vol. 29(2), pages 638-643.
    11. 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.
    12. Booij, Adam S. & van Praag, Bernard M.S., 2009. "A simultaneous approach to the estimation of risk aversion and the subjective time discount rate," Journal of Economic Behavior & Organization, Elsevier, vol. 70(1-2), pages 374-388, May.
    13. repec:cup:judgdm:v:16:y:2021:i:1:p:57-93 is not listed on IDEAS
    14. David J. Butler & Graham C. Loomes, 2007. "Imprecision as an Account of the Preference Reversal Phenomenon," American Economic Review, American Economic Association, vol. 97(1), pages 277-297, March.
    15. Cathleen Johnson & Aurélien Baillon & Han Bleichrodt & Zhihua Li & Dennie Dolder & Peter P. Wakker, 2021. "Prince: An improved method for measuring incentivized preferences," Journal of Risk and Uncertainty, Springer, vol. 62(1), pages 1-28, February.
    16. Pavlo Blavatskyy, 2014. "Stronger utility," Theory and Decision, Springer, vol. 76(2), pages 265-286, February.
    17. Charles-Cadogan, G., 2021. "Incoherent Preferences," CRETA Online Discussion Paper Series 69, Centre for Research in Economic Theory and its Applications CRETA.
    18. Zonna, Davide, 2016. "Sprechi di cibo e tentativi di riduzione. Un caso sperimentale [Avoiding food waste. A field experiment]," MPRA Paper 76097, University Library of Munich, Germany.
    19. Kim Kaivanto & Eike Kroll, 2014. "Alternation bias and reduction in St. Petersburg gambles," Working Papers 65600286, Lancaster University Management School, Economics Department.
    20. Attema, Arthur E. & Brouwer, Werner B.F., 2013. "In search of a preferred preference elicitation method: A test of the internal consistency of choice and matching tasks," Journal of Economic Psychology, Elsevier, vol. 39(C), pages 126-140.
    21. Pavlo Blavatskyy, 2009. "Preference reversals and probabilistic decisions," Journal of Risk and Uncertainty, Springer, vol. 39(3), pages 237-250, December.
    22. Carlos Alós-Ferrer & Johannes Buckenmaier & Michele Garagnani, 2020. "Stochastic choice and preference reversals," ECON - Working Papers 370, Department of Economics - University of Zurich, revised Jul 2021.
    23. 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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    JEL classification:

    • C90 - Mathematical and Quantitative Methods - - Design of Experiments - - - General

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