Preference reversals and probabilistic decisions
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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 decide 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.
KeywordsPreference reversal Probabilistic choice Probabilistic valuation Certainty equivalent Probability equivalent
JEL ClassificationD01 D80 D81 C91
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