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The preference reversal phenomenon: Response mode, markets and incentives

Cox, James C. and Grether, David M. (1996) The preference reversal phenomenon: Response mode, markets and incentives. Economic Theory, 7 (3). pp. 381-405. ISSN 0938-2259. doi:10.1007/BF01213657. https://resolver.caltech.edu/CaltechAUTHORS:20170829-073853859

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Abstract

This paper addresses the apparent conflict between the results of experiments on individual choice and judgement and the results of market experiments. Data are reported for experiments designed to analyze the effects of (a) economic incentives, repetition, feedback and information and (b) choice and valuation response modes on (c) subjects' decisions in paired market and nonmarket environments. Causes of divergent market and nonmarket behavior are identified in the context of the preference reversal phenomenon (PRP). Study of the PRP is extended to two types of market environments. The PRP is observed on the first repetition in a market setting (second price auction) with immediate feedback, both with and without financial incentives. However, after five repetitions of the auction, the subjects' bids are generally consistent with their choices and the asymmetry between the rates of predicted and unpredicted reversals disappears. An individual pricing task using the BDM mechanism yields similar results on the first repetition but results which differ from the second price auction on the fifth repetition. Choice tasks produce lower rates of reversals than do pricing tasks in both market and individual decision making settings. We are grateful for financial support from the National Science Foundation (grant no. SES-8820552) and the California Institute of Technology. Research facilities were provided by the Economic Science Laboratory at the University of Arizona. Valuable computer programming was provided by Sean Coates and Shawn LaMaster. We thank Professor Jeffrey Dubin for his help in setting up the software for the generalized Tobit model, and Professors Joyce Berg, Graham Loomes, and Charles R. Plott for helpful comments.


Item Type:Article
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URLURL TypeDescription
https://doi.org/10.1007/BF01213657DOIArticle
https://link.springer.com/article/10.1007%2FBF01213657PublisherArticle
http://resolver.caltech.edu/CaltechAUTHORS:20170828-162350199Related ItemWorking Paper
Additional Information:© 1996 Springer-Verlag. Received: 15 September 1994; Revised: 02 March 1995. We are grateful for financial support from the National Science Foundation (grant no. SES-8820552) and the California Institute of Technology. Research facilities were provided by the Economic Science Laboratory at the University of Arizona. Valuable computer programming was provided by Sean Coates and Shawn LaMaster. We thank Professor Jeffrey Dubin for his help in setting up the software for the generalized Tobit model, and Professors Joyce Berg, Graham Loomes, and Charles R. Plott for helpful comments.
Funders:
Funding AgencyGrant Number
NSFSES-8820552
CaltechUNSPECIFIED
Issue or Number:3
DOI:10.1007/BF01213657
Record Number:CaltechAUTHORS:20170829-073853859
Persistent URL:https://resolver.caltech.edu/CaltechAUTHORS:20170829-073853859
Official Citation:Cox, J.C. & Grether, D.M. Econ Theory (1996) 7: 381. https://doi.org/10.1007/BF01213657
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:80885
Collection:CaltechAUTHORS
Deposited By: Tony Diaz
Deposited On:29 Aug 2017 20:55
Last Modified:15 Nov 2021 19:39

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