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Preference reversals and probabilistic decisions

Pavlo R. Blavatskyy
Journal of Risk and Uncertainty
Vol. 39, No. 3 (December 2009), pp. 237-250
Published by: Springer
Stable URL: http://www.jstor.org/stable/41761400
Page Count: 14
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Preference reversals and probabilistic decisions
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Abstract

Preference reversals occur when different (but formally equivalent) elicitation methods reveal conflicting preferences over two alternatives. This paper shows that when people have fuzzy preferences, i.e. when they decide in a probabilistic manner, their observed decisions can generate systematic preference reversals. A simple model of probabilistic choice and valuation can account for a higher incidence of standard (nonstandard) preference reversals for certainty (probability) equivalents and it can also rationalize the existence of strong reversals. An important methodological contribution of the paper is a new definition of a probabilistic certainty/probability equivalent of a risky lottery.

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