preference reversal

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1 A tendency, when facing a choice between gambles of nearly equal expected values in certain circumstances, to prefer one gamble but to place a higher monetary value on the other. Reversals occur when one gamble offers a high probability of winning a small prize and the other offers a low probability of winning a large prize. In a typical example, the high-probability H gamble offered an 8/9 probability of winning $4 and the L gamble a 1/9 probability of winning $40, and most participants preferred H; but when they were asked to place a monetary value on each gamble—to state the lowest price at which they would exchange it for cash—most put a higher value on L. The phenomenon was first reported in the Journal of Experimental Psychology in 1971 by the US psychologist Sarah C. Lichtenstein (born 1933) and the US-based Israeli psychologist Paul Slovic (born 1938), who attributed it to a finding that they had earlier (in 1968) reported, namely that preferences for gambles (and ratings of their attractiveness) are more highly correlated with probabilities of winning than with payoff sizes, whereas buying and selling prices of gambles are more highly correlated with payoff sizes than with probabilities of winning. Subsequent research, beginning with an experiment reported in 1990 by the Israeli psychologists Amos Tversky (1937–96), Paul Slovic, and Daniel Kahneman (born 1934) showed that most preference reversals are not caused by violations of expected utility theory but by overpricing of low-probability gambles relative to the choice preference: a person who chooses between (H) $10 for sure and (L) a 1/3 probability of winning $40 is quite likely to prefer H but nevertheless to assign a value above $10 to L, which implies an overpricing of L relative to the choice preference. This may be a result of anchoring and adjustment on the money scale.

2 A tendency to prefer one alternative when a set of alternatives is presented simultaneously and evaluated jointly but to prefer a different one when the same alternatives are presented in isolation and evaluated separately. The phenomenon was first published in an article in the Administrative Science Quarterly in 1992 by the US decision theorists Max H. Bazerman (born 1955), George F. Loewenstein (born 1955), and Sally Blount White (born 1961), who presented decision makers with a hypothetical dispute between neighbours and two potential resolutions involving splitting proceeds from the sale of vacant land between the two properties:  A: $600 for yourself and $800 for your neighbour;  B: $500 for yourself and $500 for your neighbour.The results were that 75 per cent of decision makers who were presented with the two alternatives simultaneously and were asked which they considered more acceptable preferred A, but 71 per cent who were presented with the alternatives one at a time and were asked to indicate the acceptability of each on a rating scale preferred B.

Subjects: Psychology.

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