Reflection of transitive and intransitive preferences: A test of prospect theory

Abstract

Prospect theory (PT) (D. Kahneman & A. Tversky, 1979, Econometrica, 47, 263–291) assumes that monetary outcomes are coded as gains and losses and that the value function for money is S shaped and steeper for losses. PT also predicts a reflection effect—preferences among strictly positive prospects are reversed when the gains are converted to equivalent losses. It was hypothesized that as a result of these effects subjects who are (in)transitive in the domain of gains would reflect their choices and behave (in)transitively in the domain of losses as well. The hypothesis was tested in a within-subject design using modified versions of the gambles from A. Tversky's (1969), (Psychological Review, 76, 31–48) study of intransitivity and Kahneman and Tversky's (1979) exposition of PT. The results provide strong empirical support for the reflection effect and shape of the value function hypothesized by PT and demonstrate an equal number of violations of transitivity for gains and losses. As predicted, most (in)transitive subjects in the domain of gains were also (in)transitive in the domain of losses. Furthermore, for most transitive subjects the preference ranking of the negative gambles was an exact mirror image of the comparable scale for positive prospects. However, the hypothesis that intransitive triples would also be reflected was not supported.