LEC 2 - CHOICE AND VALUES Flashcards

1
Q

what is preference reversal

A

Preference reversal is an experimentally observed phenomenon in which subjects, when asked to choose between suitably matched pairs of lotteries and then to state the lowest amount of money they would be willing to accept in exchange for the right to participate in each of these lotteries, announce the lowest amount for the chosen lottery.

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2
Q

which assumptions does preference reversal violate

A

transitivity: if a>b, b>c, then a>c

procedure invariance: revelation of preferences should not depend on elicitation method

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3
Q

what are the consumer preference assumptions

A

completeness: a consumer can rank goods/services
transitivity: if a>b, b>c, then a>c

procedure invariance: revelation of preferences should not depend on elicitation method

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4
Q

what was the aim of the Grether & Plott 1979 ; Economic Theory of Choice and the Preference Reversal Phenomenon

A

Does preference reversal exist in situations where economic theory is generally applied?

Can preference reversal be explained by applying standard economic theory or some variant thereof?

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5
Q

briefly explain the Grether & Plott 1979 ; Economic Theory of Choice and the Preference Reversal Phenomenon

A

two treatments - RLI and no incentive

Three pairs of gambles. A and B. Randomised whether A or B was $ (high money less chance) or P-bet (lower money high chance)
Indicate preferred gamble or indifferent

Results virtually identical to those with monetary incentives

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6
Q

Why might Preference Reversals occur

A

Misspecified Incentives

Income (wealth) effects - Subjects will have an increasing expected income throughout the experiment. Risk aversion might change with income. Individual chooses over identical gambles with differing initial levels of wealth

Confusion and misunderstanding

Information Processing – Decision Costs - Anchoring and adjustment

Unsophisticated subjects?

Indifference
Are subjects offered the possibility of indicating indifference?

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7
Q

what assumptions of the standard model does preference reversal break

A

don’t have well behaved and stable preferences - violate transitivity

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8
Q

how did Lichtenstein, S., Slovic, P. (1973). Response-induced reversals of preference in gambling: an extended replication in Las Vegas add to the research. and what were there predictions

A

To study if preference reversals occur in a real play setting using both positive and negative expected value bets - tested both domains

Positive bets;
P > $ but V($) > V(P). V($) is over-priced because focus is on the winning amount (forget the probabilities)
As found in majority of preference reversals in G&P
Negative bets;
P < $ but V($) < V(P). V($) is under-priced because focus is on the loss amount (forget the probabilities)

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9
Q

what did Lichtenstein, S., Slovic, P. (1973). Response-induced reversals of preference in gambling: an extended replication in Las Vegas conclude

A

Preference reversal occur in both negative and positive bets

Preference reversal occur outside the lab

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10
Q

whats the bdm method

A

 Truth-telling. Incentive to reveal true private value

 Auction; The subject owns a bet and formulates a selling price. The
selling price is compared to an offer price determined by a random
number generator

 If the offer price is greater than or equal to the minimum selling price for the item’s
bet, the subject sells the bet. The subject receives the offer price and do not play
out the bet

 On the other hand, if the offer price is less than the stated selling price. The
subject keeps the bet and is paid according to its outcome

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