Preference reversals and probabilistic choice

Pavlo R. Blavatskyy

No 383, IEW - Working Papers from Institute for Empirical Research in Economics - University of Zurich

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 choose 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.

Keywords: Preference reversal; probabilistic choice; certainty equivalent; probability equivalent; valuation (search for similar items in EconPapers)
JEL-codes: C91 D01 D80 D81 (search for similar items in EconPapers)
Date: 2008-08
New Economics Papers: this item is included in nep-cbe, nep-dcm, nep-evo and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:zur:iewwpx:383

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