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Preference Reversals and Induced Risk Preferences: Evidence for Noisy Maximization

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  • Berg, Joyce E
  • Dickhaut, John W
  • Rietz, Thomas A

Abstract

We combine two research lines: preference reversal research (Lichtenstein and Slovic, 1971) and research on lottery-based risk preference induction (Roth and Malouf, 1979). Our results are informative for both research lines. We show that inducing risk preferences in preference reversal experiments has dramatic effects. First, while our subjects still display reversals, they do not display the usual pattern of "predicted" reversals suggested by the compatibility hypothesis. By inducing risk averse and risk loving preferences, we can dramatically reduce reversal rates and even produce the opposite pattern of reversals. Our results are consistent with the assumption that subjects maximize expected utility with error. This provides evidence that Camerer and Hogarth's (1999) framework for incentive effects can be extended to include the risk preference induction reward scheme. Copyright 2003 by Kluwer Academic Publishers

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  • Berg, Joyce E & Dickhaut, John W & Rietz, Thomas A, 2003. "Preference Reversals and Induced Risk Preferences: Evidence for Noisy Maximization," Journal of Risk and Uncertainty, Springer, vol. 27(2), pages 139-170, October.
    • Handle: RePEc:kap:jrisku:v:27:y:2003:i:2:p:139-70
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    Cited by:

    1. Joyce E Berg & John W Dickhaut & Thomas A Rietz, 2004. "Preference Reversals: The Impact of Truth-Revealing Incentives," Levine's Bibliography 122247000000000571, UCLA Department of Economics.
    2. Louise Allsopp, 2004. "An Experiment to Investigate the Externalities of Search," The Economic Record, The Economic Society of Australia, vol. 80(251), pages 423-435, December.
    3. Berg, Joyce E. & Dickhaut, John W. & Rietz, Thomas A., 2010. "Preference reversals: The impact of truth-revealing monetary incentives," Games and Economic Behavior, Elsevier, vol. 68(2), pages 443-468, March.
    4. Dickhaut, John & Houser, Daniel & Aimone, Jason A. & Tila, Dorina & Johnson, Cathleen, 2013. "High stakes behavior with low payoffs: Inducing preferences with Holt–Laury gambles," Journal of Economic Behavior & Organization, Elsevier, vol. 94(C), pages 183-189.
    5. Berg, Joyce E. & Dickhaut, John W. & Rietz, Thomas A., 2013. "The “play-out” effect and preference reversals: Evidence for noisy maximization," Journal of Economic Behavior & Organization, Elsevier, vol. 94(C), pages 160-171.

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