LEC 2 - CHOICE AND VALUES Flashcards
what is preference reversal
Preference reversal is an experimentally observed phenomenon in which subjects, when asked to choose between suitably matched pairs of lotteries and then to state the lowest amount of money they would be willing to accept in exchange for the right to participate in each of these lotteries, announce the lowest amount for the chosen lottery.
which assumptions does preference reversal violate
transitivity: if a>b, b>c, then a>c
procedure invariance: revelation of preferences should not depend on elicitation method
what are the consumer preference assumptions
completeness: a consumer can rank goods/services
transitivity: if a>b, b>c, then a>c
procedure invariance: revelation of preferences should not depend on elicitation method
what was the aim of the Grether & Plott 1979 ; Economic Theory of Choice and the Preference Reversal Phenomenon
Does preference reversal exist in situations where economic theory is generally applied?
Can preference reversal be explained by applying standard economic theory or some variant thereof?
briefly explain the Grether & Plott 1979 ; Economic Theory of Choice and the Preference Reversal Phenomenon
two treatments - RLI and no incentive
Three pairs of gambles. A and B. Randomised whether A or B was $ (high money less chance) or P-bet (lower money high chance)
Indicate preferred gamble or indifferent
Results virtually identical to those with monetary incentives
Why might Preference Reversals occur
Misspecified Incentives
Income (wealth) effects - Subjects will have an increasing expected income throughout the experiment. Risk aversion might change with income. Individual chooses over identical gambles with differing initial levels of wealth
Confusion and misunderstanding
Information Processing – Decision Costs - Anchoring and adjustment
Unsophisticated subjects?
Indifference
Are subjects offered the possibility of indicating indifference?
what assumptions of the standard model does preference reversal break
don’t have well behaved and stable preferences - violate transitivity
how did Lichtenstein, S., Slovic, P. (1973). Response-induced reversals of preference in gambling: an extended replication in Las Vegas add to the research. and what were there predictions
To study if preference reversals occur in a real play setting using both positive and negative expected value bets - tested both domains
Positive bets;
P > $ but V($) > V(P). V($) is over-priced because focus is on the winning amount (forget the probabilities)
As found in majority of preference reversals in G&P
Negative bets;
P < $ but V($) < V(P). V($) is under-priced because focus is on the loss amount (forget the probabilities)
what did Lichtenstein, S., Slovic, P. (1973). Response-induced reversals of preference in gambling: an extended replication in Las Vegas conclude
Preference reversal occur in both negative and positive bets
Preference reversal occur outside the lab
whats the bdm method
Truth-telling. Incentive to reveal true private value
Auction; The subject owns a bet and formulates a selling price. The
selling price is compared to an offer price determined by a random
number generator
If the offer price is greater than or equal to the minimum selling price for the item’s
bet, the subject sells the bet. The subject receives the offer price and do not play
out the bet
On the other hand, if the offer price is less than the stated selling price. The
subject keeps the bet and is paid according to its outcome
