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Do preference reversals generalise?: Results on ambiguity and loss aversion

Research output: Contribution to journalJournal article

Published

Journal publication date02/2012
JournalJournal of Economic Psychology
Journal number1
Volume33
Number of pages10
Pages48-57
Original languageEnglish

Abstract

Preference reversals are frequently observed in the lab, but almost all designs use completely transparent prospects, which are rarely features of decision making elsewhere. This raises questions of external validity. We test the robustness of the phenomenon to gambles that incorporate realistic ambiguity in both payoffs and probabilities. In addition, we test a recent explanation of preference reversals by loss aversion, which would also restrict the incidence of reversals outside the lab. According to this account, reversals occur largely because the valuation task endows subject with a gamble, activating loss aversion. This contrasts with the choice task, where the reference point is pre-experiment wealth. We test this explanation by holding the reference point constant. Our evidence suggests that reversals are only slightly diminished with ambiguity. We find no evidence supporting their explanation by loss aversion. (C) 2011 Elsevier B.V. All rights reserved.