Preference Reversals and the Independence Axiom

Abstract

Of all of the paradoxical patterns of behavior reported in laboratory experiments, one of the most perplexing for decision theorists is the preference phenomenon. A subject in a preference experiment is typically given a choice between a lottery with a high probability of winning a modest amount of money, a bet, and a lottery with a low probability of winning a large amount of money, a lowest amount of money for which the subject would willingly sell either of these lotteries is also elicited. most common reversal is for a subject to choose the P bet over the $ bet but to put a higher selling price on the $ bet. Preference reversals were first reported by Harold Lindman (1971) and Sarah Lichtenstein and Paul Slovic (1971). In discussing the psychologists' discovery of such reversals, David Grether and Charles Plott remark: The inconsistency is deeper than mere lack of transitivity or even stochastic transitivity. It suggests that no optimization principles of any sort lie behind even the simplest of human choices... (1979, p. 623). This paper offers a simple alternative explanation of documented preference reversals, an explanation that does not require the abandonment of the transitivity assumption.