A Theory of Preference Reversals.

Abstract : The preference reversal phenomenon refers to the fact that people who choose gamble A over B often ask for more money to sell B than A. This finding is remarkably robust over subjects, experiments, differing incentives, and types of gambles (e.g., gains vs. losses). However, previous research has confounded response method (judgment vs. choice) with the worth scale on which the response is expressed (prices in dollars vs. attractiveness of the gamble). When these two factors are crossed in a 2 x 2 design, 6 pairs of preference reversals are theoretically possible. An experiment to test for the existence of these reversals revealed that 5 out of 6 types were significant. A theory to explain these results was developed in which the basic evaluation of a gamble, assumed to be a function of the utilities and probabilities of the payoffs, is translated onto various worth scales via a subjective interpolation process. This process involves the matching of proportional adjustments on the utility scale to those on the worthscales (prices, ratings, etc.). The model accounts for the direction of all 5 reversals and correctly predicts that some directions are impossible. The model is tested on new data from a study by Tversky and Slovic (1984) and fits their data well.