The Causes of Preference Reversal

Abstract

Axiomatic theories of choice introduce preference as a primitive relation, which is interpreted through specific empirical procedures such as choice or pricing. Models of rational choice assume a principle of procedure invariance, which requires strategically equivalent methods of elicitation to yield the same preference order. Thus, if the decision maker prefers A to B, then the cash equivalent, or minimum selling price, of A should exceed that of B. However, there is a substantial body of evidence showing that the price ordering of risky prospects is systematically different from the choice ordering, contrary to standard theories of choice.