This document summarizes an experiment by Grether and Plott on preference reversals. In the experiment, subjects were asked to choose between two gambles and then state prices for the gambles. For many subjects, their stated preferences from choices and prices were reversed, violating assumptions of economic theory. Grether and Plott found preference reversals occurred even when addressing economists' concerns about incentives and language. This suggests a fundamental flaw in economic theories assuming perfectly rational choice. Later research found preference reversals reduced but not eliminated by higher stakes, awareness of consequences, or market pressures. Failures of transitivity and procedural invariance appear to explain many preference reversals.
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Theory of Consumer Choice Lecture Notes (Economics)FellowBuddy.com
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Consumer Behaviour is the study of how individual customers, groups or organizations select, buy, use, and dispose ideas, goods, and services to satisfy their needs and wants. It refers to the actions of the consumers in the marketplace and the underlying motives for those actions. The study of Consumer Behaviour assumes that the consumers are actors in the marketplace.
Expertsmind.com prepares microeconomics assignments, economics homework and projects by tutor’s help for all grade levels. Get solved microeconomics and economics questions with step by step answers. From qualified tutors.
Behavioral Public Choice The Behavioral Paradox of Gove.docxtaitcandie
Behavioral Public Choice:
The Behavioral Paradox of
Government Policy
W. Kip Viscusf & Ted Gayer”
I. Overview
W hat are the economic justifications for governm ent inter
vention in the economy? In a m arket economy, prices coordi
nate the activities of buyers and sellers and convey inform ation
about the strength of consum er dem and for a good and the
costs of supplying it. Because trade is voluntary, buyers and
sellers only m ake exchanges w hen both parties benefit. Under
ideal m arket conditions, this process leads to an efficient alloca
tion of goods w ithout governm ent intervention.
However, economics has long recognized instances in which
markets can fail to lead to an efficient outcome. The long-standing
view is that either market power or the nonexistence of markets
causes market failures. Market power is present w hen some indi
viduals or firms are price makers (for example, monopolists) ra
ther than participants in a perfectly competitive environment.
Such situations typically lead to the production of a less than effi
cient quantity of goods. The problem of market power is the pur
view of industrial organization economics and antitrust policy. * 1
The nonexistence of markets, or the failure of a robust market to
arise, can occur for a num ber of reasons, such as asymmetric in
formation (when one party in a transaction has information that is
not available to another) and public goods (when a good is non
rival and nonexcludable in consumption and thus likely to be un-
* University Distinguished Professor of Law, Economics, and Management,
Vanderbilt Law School, 131 21st Ave. South, Nashville, TN 37203. [email protected]
vanderbilt.edu. We are grateful to the Mercatus Center for their support.
**Vice President and Director, Economic Studies, Brookings Institution, 1775
Massachusetts Ave. NW, Washington, DC 20036. [email protected]
1. H arvey S. Rosen & Ted Gayer, Public Fin a n c e 46-48 (10th ed. 2013).
mailto:[email protected]
974 Harvard Journal of Law & Public Policy [Vol. 38
dersupplied by the market). Another cause for the nonexistence of
markets is externalities, which occur when transactions impose
costs or benefits on a third party that are not considered in the
market exchange. A classic example is when a factory produces
and sells a good to a consumer to their m utual advantage, but the
pollution generated by the production of the good has a negative
impact on the health of nearby residents. A market for the clean
air in the affected area would not emerge if high transaction costs
of organizing the pollution victims prevented the parties from
negotiating.2 The market system will fail to internalize the health
costs imposed by the factory's operations and lead to inefficiently
high production and health consequences.
For about a century, economists have argued that policymakers
should rely, when possible, on market-based principles in design
ing regulations to address thes.
You are on the right track. Here are a few sugg.docxtarifarmarie
You are on the right track. Here are a few suggestions:
1. I would work on making each slide more visually appealing. Here is
a before/after example:
Before:
After (kept title only in the orange section, numbered the four step,
centered the text):
2. You can tell me more in each of your notes section, you are a little
brief.
3. Please make sure you tell me where you are getting your information
on each slide.
Behavioral Public Choice:
The Behavioral Paradox of
Government Policy
W. Kip Viscusf & Ted Gayer”
I. Overview
W hat are the economic justifications for governm ent inter
vention in the economy? In a m arket economy, prices coordi
nate the activities of buyers and sellers and convey inform ation
about the strength of consum er dem and for a good and the
costs of supplying it. Because trade is voluntary, buyers and
sellers only m ake exchanges w hen both parties benefit. Under
ideal m arket conditions, this process leads to an efficient alloca
tion of goods w ithout governm ent intervention.
However, economics has long recognized instances in which
markets can fail to lead to an efficient outcome. The long-standing
view is that either market power or the nonexistence of markets
causes market failures. Market power is present w hen some indi
viduals or firms are price makers (for example, monopolists) ra
ther than participants in a perfectly competitive environment.
Such situations typically lead to the production of a less than effi
cient quantity of goods. The problem of market power is the pur
view of industrial organization economics and antitrust policy. * 1
The nonexistence of markets, or the failure of a robust market to
arise, can occur for a num ber of reasons, such as asymmetric in
formation (when one party in a transaction has information that is
not available to another) and public goods (when a good is non
rival and nonexcludable in consumption and thus likely to be un-
* University Distinguished Professor of Law, Economics, and Management,
Vanderbilt Law School, 131 21st Ave. South, Nashville, TN 37203. [email protected]
vanderbilt.edu. We are grateful to the Mercatus Center for their support.
**Vice President and Director, Economic Studies, Brookings Institution, 1775
Massachusetts Ave. NW, Washington, DC 20036. [email protected]
1. H arvey S. Rosen & Ted Gayer, Public Fin a n c e 46-48 (10th ed. 2013).
mailto:[email protected]
974 Harvard Journal of Law & Public Policy [Vol. 38
dersupplied by the market). Another cause for the nonexistence of
markets is externalities, which occur when transactions impose
costs or benefits on a third party that are not considered in the
market exchange. A classic example is when a factory produces
and sells a good to a consumer to their m utual advantage, but the
pollution generated by the production of the good has a negative
impact on the health of nearby residents. A market for the clean
air in the affected.
UNDERSTANDING DECISION/ GAME THEORY FOR BETTER RISK ASSESSMENT.Kaustav Lahiri
Comes from the theory of choicein economics, psychology, philosophy, mathematics, computer science, and statistics is concerned with identifying the values, uncertainties and other issues relevant in a given decision, its rationality, and the resulting optimal decision. It is closely related to the field of game theory; decision theory is concerned with the choices of individual agents whereas game theory is concerned with interactions of agents whose decisions affect each other.
* Corresponding author. Tel.: 773 702 7282; fax: 773 702 9937; e-mail: [email protected]
edu.
1 The comments of Brad Barber, David Hirshleifer, S.P. Kothari, Owen Lamont, Mark Mitchell,
Hersh Shefrin, Robert Shiller, Rex Sinquefield, Richard Thaler, Theo Vermaelen, Robert Vishny, Ivo
Welch, and a referee have been helpful. Kenneth French and Jay Ritter get special thanks.
Journal of Financial Economics 49 (1998) 283—306
Market efficiency, long-term returns, and behavioral
finance1
Eugene F. Fama*
Graduate School of Business, University of Chicago, Chicago, IL 60637, USA
Received 17 March 1997; received in revised form 3 October 1997
Abstract
Market efficiency survives the challenge from the literature on long-term return
anomalies. Consistent with the market efficiency hypothesis that the anomalies are
chance results, apparent overreaction to information is about as common as underreac-
tion, and post-event continuation of pre-event abnormal returns is about as frequent as
post-event reversal. Most important, consistent with the market efficiency prediction that
apparent anomalies can be due to methodology, most long-term return anomalies tend to
disappear with reasonable changes in technique. ( 1998 Elsevier Science S.A. All rights
reserved.
JEL classification: G14; G12
Keywords: Market efficiency; Behavioral finance
1. Introduction
Event studies, introduced by Fama et al. (1969), produce useful evidence on
how stock prices respond to information. Many studies focus on returns in
a short window (a few days) around a cleanly dated event. An advantage of this
approach is that because daily expected returns are close to zero, the model for
expected returns does not have a big effect on inferences about abnormal returns.
0304-405X/98/$19.00 ( 1998 Elsevier Science S.A. All rights reserved
PII S 0 3 0 4 - 4 0 5 X ( 9 8 ) 0 0 0 2 6 - 9
The assumption in studies that focus on short return windows is that any lag
in the response of prices to an event is short-lived. There is a developing
literature that challenges this assumption, arguing instead that stock prices
adjust slowly to information, so one must examine returns over long horizons to
get a full view of market inefficiency.
If one accepts their stated conclusions, many of the recent studies on long-
term returns suggest market inefficiency, specifically, long-term underreaction
or overreaction to information. It is time, however, to ask whether this litera-
ture, viewed as a whole, suggests that efficiency should be discarded. My answer
is a solid no, for two reasons.
First, an efficient market generates categories of events that individually
suggest that prices over-react to information. But in an efficient market, appar-
ent underreaction will be about as frequent as overreaction. If anomalies split
randomly between underreaction and overreaction, they are consistent with
market efficiency. We shall see that a roughly even split between apparent
overreaction and underreact ...
Market efficiency survives the challenge from the literature on long-term return anomalies. Consistent with the market efficiency hypothesis that the anomalies are chance results, apparent overreaction to information is about as common as under-reaction, and post-event continuation of preevent abnormal returns is about as frequent as post-event reversal. Most important, consistent with the market efficiency prediction that apparent anomalies can be due to methodology, most long-term return anomalies tend to
disappear with reasonable changes in technique.
Limited Attention, Information Disclosure, and Financial ReportingDavid Hirshleifer
We model firms' choices between alternative means of presenting information, and the effects of different presentations on market prices when investors have limited attention and processing power. In a market equilibrium with partially attentive investors, we examine the effects of alternative: levels of discretion in pro forma earnings disclosure, methods of accounting for employee option compensation, and degrees of aggregation in reporting. We derive empirical implications relating pro forma adjustments, option compensation, the growth, persistence, and informativeness of earnings, short-run managerial incentives, and other firm characteristics to stock price reactions, misvaluation, long-run abnormal returns, and corporate decisions.
The paper is available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=334940
Version March 13, 2015 – Please contact authors for an updated version before citing
Randomized Controlled Trials (RCT) are considered the gold standard in empirical social sciences and have been increasingly used in recent years. While their internal validity is in most cases beyond discussion, RCTs still need to establish external validity. External validity is the crucial determinant for a study’s policy relevance and might be at stake because of potential general equilibrium effects, Hawthorne effects,
or representativeness problems that compromise generalizing results beyond the studied population. For this paper, we reviewed all RCTs published in leading economic journals between 2009 and 2012 and scrutinized them for the way in which they treat external validity. Based on a set of objective indicators, we find that the RCT literature does not adequately account for potential hazards to external validity. A large part of published RCTs does not discuss potential limitations to external validity or provide the information that is necessary to assess potential problems. We conclude by calling for a more systematic approach to designing RCTs and to reporting the results.
Why Behavioral Finance is Helpful for Investors to Decision Making Process?QUESTJOURNAL
ABSTRACT: Behavioral finance is the study of the influence of psychology on the behavior of financial practitioners and the subsequent effect on markets. It is of interest because it helps explain why and how markets might be inefficient.
Intro to Crime and Criminal Justice Third Essay Exam .docxvrickens
Intro to Crime and Criminal Justice
Third Essay Exam
Write a minimum of 7 pages (Times New Roman, double space, 12pt font). As always, use
information mainly from our text to answer the questions—but you must also supplement your
answers with your own critical thinking and input as well. The following questions are designed
to not be 'chapter specific'. Instead, they challenge you to use information from several chapters.
Each answer should roughly be the same length. Be sure to write and provide direct support
for your answers from the text and/or other sources (e.g. in-text citations, page numbers,
end of document references).
1. Do you think the criminal justice system “works” in the United States? Why or why not?
Explain in detail and provide clear examples.
Try to think about the big picture here, and include a discussion about system goals such as
crime prevention or reduction, deterrence, rehabilitation cost/benefits, definitions of justice, etc.
2. This course introduced the notion that the criminal justice system and all its players are
inherently and generally limited in terms of their ability to prevent or reduce crime. What is
meant by this? Provide a robust explanation.
Do you think that other institutions such as the family, schools, and organized religion are
better at social control and preventing crime than the criminal justice system? If so, which ones
and in what ways? This answer may partially depend upon how efficient you believe the criminal
justice system is, and on your personal beliefs regarding the importance of family and other
social institutions in regulating behavior—be sure to provide clear support for your answers.
3. Present and discuss some of the most common myths we have discussed in this course about
the criminal justice system (e.g. the rationale behind pretrial preventive detention, minorities
commit more crime, what the processing of cases looks like—plea bargaining and bail instead of
trial, more officers and more technology will reduce crime, the crime rate is going up, criminals
are dangerous and commit violent crime, etc.)
MSL 5080, Methods of Analysis for Business Operations 1
Course Learning Outcomes for Unit VI
Upon completion of this unit, students should be able to:
5. Explain the criteria for making decisions under organizational uncertainty.
6. Illustrate the various methods of decision-making under risk.
Reading Assignment
Chapter 3: Decision Analysis, pp. 67–85; and Section 3.10, Utility Theory, on pp. 88–89
Unit Lesson
Types of Decision-Making Environments
As you may recall from the previous unit, the Thompson Lumber example of proposed sales expansion (seen
on pages 68–69 of the textbook) was explored with a condition of uncertainty. Thompson knew the
payoffs/profits for each alternative under each of two outcomes (favorable market or unfavorable market), but
he did not know the outcome of the mar ...
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Sustainability has become an increasingly critical topic as the world recognizes the need to protect our planet and its resources for future generations. Sustainability means meeting our current needs without compromising the ability of future generations to meet theirs. It involves long-term planning and consideration of the consequences of our actions. The goal is to create strategies that ensure the long-term viability of People, Planet, and Profit.
Leading companies such as Nike, Toyota, and Siemens are prioritizing sustainable innovation in their business models, setting an example for others to follow. In this Sustainability training presentation, you will learn key concepts, principles, and practices of sustainability applicable across industries. This training aims to create awareness and educate employees, senior executives, consultants, and other key stakeholders, including investors, policymakers, and supply chain partners, on the importance and implementation of sustainability.
LEARNING OBJECTIVES
1. Develop a comprehensive understanding of the fundamental principles and concepts that form the foundation of sustainability within corporate environments.
2. Explore the sustainability implementation model, focusing on effective measures and reporting strategies to track and communicate sustainability efforts.
3. Identify and define best practices and critical success factors essential for achieving sustainability goals within organizations.
CONTENTS
1. Introduction and Key Concepts of Sustainability
2. Principles and Practices of Sustainability
3. Measures and Reporting in Sustainability
4. Sustainability Implementation & Best Practices
To download the complete presentation, visit: https://www.oeconsulting.com.sg/training-presentations
India Orthopedic Devices Market: Unlocking Growth Secrets, Trends and Develop...Kumar Satyam
According to TechSci Research report, “India Orthopedic Devices Market -Industry Size, Share, Trends, Competition Forecast & Opportunities, 2030”, the India Orthopedic Devices Market stood at USD 1,280.54 Million in 2024 and is anticipated to grow with a CAGR of 7.84% in the forecast period, 2026-2030F. The India Orthopedic Devices Market is being driven by several factors. The most prominent ones include an increase in the elderly population, who are more prone to orthopedic conditions such as osteoporosis and arthritis. Moreover, the rise in sports injuries and road accidents are also contributing to the demand for orthopedic devices. Advances in technology and the introduction of innovative implants and prosthetics have further propelled the market growth. Additionally, government initiatives aimed at improving healthcare infrastructure and the increasing prevalence of lifestyle diseases have led to an upward trend in orthopedic surgeries, thereby fueling the market demand for these devices.
Unveiling the Secrets How Does Generative AI Work.pdfSam H
At its core, generative artificial intelligence relies on the concept of generative models, which serve as engines that churn out entirely new data resembling their training data. It is like a sculptor who has studied so many forms found in nature and then uses this knowledge to create sculptures from his imagination that have never been seen before anywhere else. If taken to cyberspace, gans work almost the same way.
Putting the SPARK into Virtual Training.pptxCynthia Clay
This 60-minute webinar, sponsored by Adobe, was delivered for the Training Mag Network. It explored the five elements of SPARK: Storytelling, Purpose, Action, Relationships, and Kudos. Knowing how to tell a well-structured story is key to building long-term memory. Stating a clear purpose that doesn't take away from the discovery learning process is critical. Ensuring that people move from theory to practical application is imperative. Creating strong social learning is the key to commitment and engagement. Validating and affirming participants' comments is the way to create a positive learning environment.
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Memorandum Of Association Constitution of Company.pptseri bangash
www.seribangash.com
A Memorandum of Association (MOA) is a legal document that outlines the fundamental principles and objectives upon which a company operates. It serves as the company's charter or constitution and defines the scope of its activities. Here's a detailed note on the MOA:
Contents of Memorandum of Association:
Name Clause: This clause states the name of the company, which should end with words like "Limited" or "Ltd." for a public limited company and "Private Limited" or "Pvt. Ltd." for a private limited company.
https://seribangash.com/article-of-association-is-legal-doc-of-company/
Registered Office Clause: It specifies the location where the company's registered office is situated. This office is where all official communications and notices are sent.
Objective Clause: This clause delineates the main objectives for which the company is formed. It's important to define these objectives clearly, as the company cannot undertake activities beyond those mentioned in this clause.
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Liability Clause: It outlines the extent of liability of the company's members. In the case of companies limited by shares, the liability of members is limited to the amount unpaid on their shares. For companies limited by guarantee, members' liability is limited to the amount they undertake to contribute if the company is wound up.
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Capital Clause: This clause specifies the authorized capital of the company, i.e., the maximum amount of share capital the company is authorized to issue. It also mentions the division of this capital into shares and their respective nominal value.
Association Clause: It simply states that the subscribers wish to form a company and agree to become members of it, in accordance with the terms of the MOA.
Importance of Memorandum of Association:
Legal Requirement: The MOA is a legal requirement for the formation of a company. It must be filed with the Registrar of Companies during the incorporation process.
Constitutional Document: It serves as the company's constitutional document, defining its scope, powers, and limitations.
Protection of Members: It protects the interests of the company's members by clearly defining the objectives and limiting their liability.
External Communication: It provides clarity to external parties, such as investors, creditors, and regulatory authorities, regarding the company's objectives and powers.
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Binding Authority: The company and its members are bound by the provisions of the MOA. Any action taken beyond its scope may be considered ultra vires (beyond the powers) of the company and therefore void.
Amendment of MOA:
While the MOA lays down the company's fundamental principles, it is not entirely immutable. It can be amended, but only under specific circumstances and in compliance with legal procedures. Amendments typically require shareholder
RMD24 | Retail media: hoe zet je dit in als je geen AH of Unilever bent? Heid...BBPMedia1
Grote partijen zijn al een tijdje onderweg met retail media. Ondertussen worden in dit domein ook de kansen zichtbaar voor andere spelers in de markt. Maar met die kansen ontstaan ook vragen: Zelf retail media worden of erop adverteren? In welke fase van de funnel past het en hoe integreer je het in een mediaplan? Wat is nu precies het verschil met marketplaces en Programmatic ads? In dit half uur beslechten we de dilemma's en krijg je antwoorden op wanneer het voor jou tijd is om de volgende stap te zetten.
Taurus Zodiac Sign_ Personality Traits and Sign Dates.pptxmy Pandit
Explore the world of the Taurus zodiac sign. Learn about their stability, determination, and appreciation for beauty. Discover how Taureans' grounded nature and hardworking mindset define their unique personality.
Improving profitability for small businessBen Wann
In this comprehensive presentation, we will explore strategies and practical tips for enhancing profitability in small businesses. Tailored to meet the unique challenges faced by small enterprises, this session covers various aspects that directly impact the bottom line. Attendees will learn how to optimize operational efficiency, manage expenses, and increase revenue through innovative marketing and customer engagement techniques.
3.0 Project 2_ Developing My Brand Identity Kit.pptxtanyjahb
A personal brand exploration presentation summarizes an individual's unique qualities and goals, covering strengths, values, passions, and target audience. It helps individuals understand what makes them stand out, their desired image, and how they aim to achieve it.
RMD24 | Debunking the non-endemic revenue myth Marvin Vacquier Droop | First ...BBPMedia1
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Retail media wordt gezien als het nieuwe advertising-medium en ook mediabureaus richten massaal retail media-afdelingen op. Merken die niet in de betreffende winkel liggen staan ook nog niet in de rij om op de retail media netwerken te adverteren. Marvin belicht de uitdagingen die er zijn om echt aansluiting te vinden op die markt van non-endemic advertising.
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It is a sample of an interview for a business english class for pre-intermediate and intermediate english students with emphasis on the speking ability.
chapter 10 - excise tax of transfer and business taxation
Preference reversal
1. Grether and Plott:
Economic Theory of Choice and the Preference
Reversal Phenomenon
Economics 328
Spring 2004
2. What is a Preference Reversal?
Suppose I ask you to pick one
of these two bets. The most
common answer is to choose
the P bet.
Suppose I ask you how much
you would be willing to sell each
of these gambles for. The most
common outcome puts a higher
price on the $ bet.
In other words, the preferences
implied by the selling prices are
often reversed from the stated
preferences over the two
gambles!!!
Gamble 1
"P Bet"
$4
$0
Gamble 2
"$ Bet"
$0
$16
3. What are Preference Reversals?
The most fundamental assumptions of economic theory are the
Axioms of Choice. These state that preferences are complete,
reflexive, and transitive. Preference reversals are a violation of
these fundamental assumptions. In particular, transitivity is
violated.
In some fundamental sense, individuals who exhibit preference
reversals are irrational. Such people can be turned into “money
pumps.” This has been done successfully in laboratory
experiments (Berg, Daley, Dickhaut, & O’Brien, 1985; Chu &
Chu, 1990
4. Why Might Preference Reversals Occur?
Grether and Plott hypothesize the following reasons for why preference
reversals might occur:
Misspecified Incentives: The theory only makes prediction for gamble over
real known outcomes. Gambles over hypothetical payoffs or payoffs of
unspecified value may not yield valid violations of the theory.
Income Effects: Expected utility theory is typically stated in term of the
utility of wealth. If an individual chooses over identical gambles with
differing initial levels of wealth, differing choices are not inconsistent with the
theory. This suggests that we should expect differences between buying
and selling, and that order effects can matter.
Strategic Responses: The language of buying and selling may cause
people to behave strategically, even these responses aren’t sensible for the
experimental setting. These may lead to “false” violations. These are a
form of demand induced effect.
5. Why Might Preference Reversals Occur?
Anchoring and Adjustment: Many problems are multi-dimensional and must be
evaluated over multiple aspects. In evaluating options, individuals first consider
the most prominent aspect of the problem, using the value of this aspect as an
“anchor.” They then adjust the value of the options using other aspects. As an
empirical regularity, individuals seem to adjust inadequately for secondary
aspects. This choice algorithm may be attributed to the presence of decision
costs, ease of understanding and explaining the algorithm, or ease of justifying
the algorithm. (See Tversky and Thaler’s explanation of the “compatibility
hypothesis.”)
Confusion, Misunderstanding, and Unsophisticated Subjects: Grether and Plott
admit they are being a bit paranoid on the first two counts – psychologists are
pretty careful to write clear instructions and quiz subjects before gathering data.
(Although there is some evidence that experience leads to less obviously
irrational choices.) Grether and Plott also hypothesize that volunteers from
economics and political science classes are more likely to make rational
choices. The issue of using volunteers is an important one. As for being an
economics major . . . well, if they choose to be economics majors, how rational
can they be?
6. Experimental Design
Research Question: Can the results on preference reversals
generated by psychologists be replicated using methodologies
that satisfy economists’ concerns?
Initial Hypotheses: Preference reversals reflect a fundamental
irrationality. As such, Grether and Plott expected that
preference reversals would be an artifact of how the
experiments were run.
7. Procedures and Treatments
Experiment 1 varied whether subjects received monetary incentives or
only chose over hypothetical outcomes.
Experiment 2: All subjects received monetary incentives. Neutral
language was used to describe selling prices.
All comparisons are between (rather than within) subjects.
Only one gamble, randomly chosen ex post, was actually paid off. This
reduces any income effects.
Becker-DeGroot-Marshak (BDM) mechanism used to generate selling
prices. Subjects were explicitly told it was in their best interest to reveal
their true reservation prices.
Subjects choose between three pairs of gambles, priced all six pairs of
gambles, and then choose between the last three pairs of gambles.
This ABA design is intended to reduce any order effects.
8. Experimental Results
The results from Experiment 1 without monetary incentives strongly replicate the
psychologists’ results. For 32% of all choices, preference reversals were
observed. These primarily consisted of subjects switching from the P bet to the
$ bet. Out of 127 choices of the P bet, 71 gave higher selling prices for the $
bet. There are virtually no switches in the opposite direction (14 of 130). There
do not appear to be significant order effects.
The results from Experiment 1 with monetary incentives are virtually identical to
those without monetary incentives. For 33% of all choices, preference reversals
were observed. These primarily consisted of subjects switching from the P bet
to the $ bet. Out of 99 choices of the P bet, 69 gave higher selling prices for the
$ bet. In choosing between the pairs, a significantly higher portion of subjects
select the $ bets with monetary effects. The fraction of preference reversals
subject to choosing the P bet is higher with monetary incentives. This difference
is marginally significant.
The frequency of preference reversals with “dollar equivalents” (neutral
language) rather than selling prices is virtually unchanged. Strategic behavior
does not appear to be responsible for preference reversals.
9. Conclusion
Preference reversals are an extremely robust
phenomenon! They hold up well to the main
objections raised by economists. This suggests a
fundamental flaw in the foundations of virtually all
economic theory.
10. New Explanations for Preference Reversals
While Plott and Grether do better than the psychologists at offering subjects
monetary incentives express their true preferences, it may be that these
incentives still aren’t sufficiently large. Subsequent experiments find that
preference reversals are reduced by increased stakes, but still occur with
substantial frequency.
Forcing subjects to be aware of the negative consequences of preference
reversals may eliminate the occurrence of such reversals. In other words,
subjects may be making a mistake that they can learn to avoid. Experiments
have been run in which subjects who express preference reversals are then
money pumped (ouch!). While this doesn’t reduce the frequency of reversals, it
does reduce the magnitude of reversals.
More conservative (in the non-political sense) economists have argued that
market pressures will force subjects away from preference reversals. This
reflects the touching faith many economists have in the power of markets. While
the use of a market context reduces preference reversals, it does not eliminate
them. In general, most choice anomalies appear to be robust to market
pressures. People are very stubborn in their irrationality.
11. New Explanations for Preference Reversals
For obscure theoretical reasons, the BDM mechanism may not elicit
truthful revelation of prices. The preference reversal results have been
replicated using other mechanisms that don’t have these theoretical
problems.
The two leading explanation for preferences reversals that are still
standing are failures of transitivity and failures of procedural invariance.
Tversky and Thaler give a good summary of the compatibility
hypothesis, a leading explanation of why procedural invariance fails,
and experimental evidence in favor of it. These include a number of
treatments that don’t involve choice under uncertainty, suggesting that
preference reversals are part of a broader phenomenon. A number of
experiments have been run trying to determine if preference reversals
are due to intransitivity or failures of procedural invariance. The results
are ambiguous, but it appears that both causes play a substantial role.