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Preference reversals and probabilistic decisions

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Abstract

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.

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Notes

  1. Linear function φ(.) is considered for analytical convenience. In this case, there is a closed-form solution to the integral on the left-hand side of inequality (7).

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Authors and Affiliations

  1. Institute of Public Finance, University of Innsbruck, Universitaetsstrasse 15, A-6020, Innsbruck, Austria

    Pavlo R. Blavatskyy

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  1. Pavlo R. Blavatskyy
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Correspondence to Pavlo R. Blavatskyy.

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Blavatskyy, P.R. Preference reversals and probabilistic decisions. J Risk Uncertain 39, 237–250 (2009). https://doi.org/10.1007/s11166-009-9078-9

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  • DOI: https://doi.org/10.1007/s11166-009-9078-9

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