Chapter 99 Preference Reversal: Now You See it, Now You Do Not!

Preference reversal (PR) means that an individual's choice a direct reflection of his preferences between two options is inconsistent with the ranking of his (selling) reservation prices an indirect reflection of his preferences. Such choice/reservation-price inconsistency is potential dynamite. If it existed to a significant extent, it could blow standard economic theory to pieces. And if reservation prices did not reflect preferences, market behavior is unlikely to have the welfare-economic implications normally ascribed to market economies. Earlier studies have indicated that the rate of PR is robustly significant in cases with low incentive levels and options with at most two, two-dimensional (e.g., prize and probability) outcomes. Hence, proof of choice/reservation-price inconsistency may be said to exist for such cases. High rates of PR, which are estimated to significantly and robustly exceed likely error rates, have not been observed for other, more general and more important instances of decision making.