"Preference Reversal" and the Observability of Preferences by Experimental Methods

Abstract

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Paradoxes and mechanisms for choice under risk

“…This means that PAS is a mechanism that should have been used in tests of CPT that would have had internal theoretical validity. 14 Kachelmeir and Shehata (1992) did use PAS to pay their subjects in tests of CPT, however their data are confounded by use of the Becker et al (1964) mechanism to elicit certainty equivalents, which also requires the independence axiom for its incentive compatibility (Karni and Safra 1987).…”

How certain is the uncertainty effect?

“…Any incentive-compatible mechanism should serve the goal of assessing the direction of the lottery-baseline treatment effect (i.e., the occurrence of IA violation or lack thereof), unless the mechanism interacts with the lottery and baseline treatments in a way that biases the treatment effect. Given the well-known concerns with the BDM mechanism (e.g., Karni and Safra 1987;Harrison 1992;Horowitz 2006), and having explicitly accounted for the potential 12 We were unable to obtain gift certificates worth 2x, so we used two identical table tennis balls marked x and 2x to represent the real gift certificates. Subjects were informed that if they drew a ball marked 2x, they would receive two gift certificates worth x.…”

Choice Under Uncertainty: Problems Solved and Unsolved

“…Additional analyses of these forms can be found in Chew, Karni and Safra (1987), Fishburn (1964), Segal (1984) and Yaari (1987). Although such forms allow for the modelling of preferences which are more general than those allowed by the expected utility hypothesis, each requires a different set of conditions on its component functions v(.…”

“…if the pointer in the gain wheel landed up and the pointer in the loss wheel landed down), would lose $.40 with probability .2 (if the pointers landed in the opposite positions), and would break even with probability .5 (if the pointers landed either both up or both down). An examination of Gamble B reveals that it has an identical underlying distribution, so that subjects should be indifferent between the two gambles regardless 2:1 A final "twist" on the preference reversal phenomenon: Holt (1986) and Karni and Safra (1987) have shown how the procedures used in most of these studies will only lead to truthful revelation of preferences under the added assumption that the individual satisfies the independence axiom, and has given examples of transitive non-expected utility preference rankings which lead to the typical "preference reversal" choices. How (and whether) experimenters will be able to address this issue remains to be seen.…”