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The preference reversal phenomenon: Response mode, markets and incentives (*)

Author

Listed:
  • David M. Grether

    (California Institute of Technology, Pasadena, CA 91125, USA)

  • James C. Cox

    (Department of Economics, University of Arizona, Tucson, AZ 85721, USA)

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.

Suggested Citation

  • David M. Grether & James C. Cox, 1996. "The preference reversal phenomenon: Response mode, markets and incentives (*)," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 7(3), pages 381-405.
    • Handle: RePEc:spr:joecth:v:7:y:1996:i:3:p:381-405
    Note: Received: September 15, 1994; revised version March 2, 1995
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