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- Title
Preference Reversal and Nonexpected Utility Behavior.
- Authors
Safra, Zvi; Segal, Uzi; Spivak, Avia
- Abstract
The article focuses on preference reversal phenomenon and nonexpected utility behavior. Let A = (x, p; y, 1 - p) be a lottery. This lottery yields x dollars with probability p and y dollars with probability 1 - p. It is assumed throughout that all prizes are bounded within a [- M, M] segment. Let ≥ be the decision maker's preference relation over lotteries. The functional V represents this relation if V(A) ≥ V(B) ↔ A ≥ B. A preference reversal is established whenever a decision maker prefers lottery A to B, but sets a higher selling price on B than on A. In most of the experiments that found such reversals, B was a mean-preserving spread to A. To relate preference reversals to mean-preserving spreads, the manner in which the local utility function changes must be hypothesized when the decision maker moves from one distribution to a mean-preserving spread of that distribution. Preference reversals seem to violate transitivity, one of the most fundamental assumptions in economics. They occur when a decision maker prefers lottery A over B, but puts higher selling price on B than on A. From the economist's point of view, these results are even more troublesome when subjects are offered a clear monetary incentive to reveal their true preferences.
- Subjects
REVERSAL theory (Psychology); BEHAVIOR; LOTTERIES; DECISION making; ECONOMICS
- Publication
American Economic Review, 1990, Vol 80, Issue 4, p922
- ISSN
0002-8282
- Publication type
Article