"Preference Reversal" and the Observability of Preferences by Experimental Methods

Abstract

This paper shows that: (1) the preference reversal phenomenon can be consistent with transitive preferences if these preferences violate the independence axiom of expected utility theory and (2) for the class of experiments that were used to produce the evidence concerning preference reversal, the elicitation of certainty equivalents is possible if, and only if, the respondent's preferences can be represented by functionals that are linear in the probabilities. Furthermore, a more general class of experiments is not immune to preference reversal if nonexpected utility preferences are admitted. Copyright 1987 by The Econometric Society.