Preference Reversals and Induced Risk Preferences: Evidence for Noisy Maximization
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We combine two research lines: preference reversal research (Lichtenstein and Slovic, 1971) and research on lottery-based risk preference induction (Roth and Malouf, 1979). Our results are informative for both research lines. We show that inducing risk preferences in preference reversal experiments has dramatic effects. First, while our subjects still display reversals, they do not display the usual pattern of “predicted” reversals suggested by the compatibility hypothesis. By inducing risk averse and risk loving preferences, we can dramatically reduce reversal rates and even produce the opposite pattern of reversals. Our results are consistent with the assumption that subjects maximize expected utility with error. This provides evidence that Camerer and Hogarth's (1999) framework for incentive effects can be extended to include the risk preference induction reward scheme.
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- Preference Reversals and Induced Risk Preferences: Evidence for Noisy Maximization
Journal of Risk and Uncertainty
Volume 27, Issue 2 , pp 139-170
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- Kluwer Academic Publishers
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- preference reversal
- risk preference induction
- expected utility theory
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- Author Affiliations
- 1. Department of Accounting, Henry B. Tippie College of Business, University of Iowa, Iowa City, IA, 52242, USA
- 2. Department of Accounting, Carlson School of Management, University of Minnesota, 321 19th Avenue South, Minneapolis, MN, 55455, USA
- 3. Department of Finance, Henry B. Tippie College of Business, University of Iowa, Iowa City, IA, 52242, USA