Econometrica: May, 1987, Volume 55, Issue 3

Preference Reversal and the Observability of Preferences by Experimental Methods

https://doi.org/0012-9682(198705)55:3<675:"RATOO>2.0.CO;2-7
p. 675-685

Edi Karni, Zvi Safra

This paper addresses two related issues: (a) the "preference reversal" phenomenon and transitivity of preferences and (b) the observability of preference relations by experimental methods. In the first part, we adopt the framework of the theory of expected utility with rank-dependent probabilities to show that the well known "preference reversal" phenomenon can be consistent with transitive preferences. When this phenomenon is consistent with transitive preferences, it violates the von Neumann-Morgenstern independence axiom. Consequently, the "preference reversal" phenomenon may be explicated by other nonexpected utility theories. The experiments that produced the evidence on "preference reversal" attempted to elicit the certainty equivalents of given lotteries. The second part of this paper shows that the experimental design used in many of these experiments will elicit the certainty equivalents of given lotteries if and only if the respondent's preferences can be represented by expected utility functionals. Furthermore, we show that a more general class of experiments is not immune to "preference reversal" if non-expected utility preferences are admitted.