Preference Reversals: The Impact of Truth-Revealing Monetary Incentives

54 Pages Posted: 6 Mar 2006 Last revised: 1 Jul 2008

See all articles by Joyce E. Berg

Joyce E. Berg

University of Iowa - Henry B. Tippie College of Business

John W. Dickhaut

Chapman University (Deceased)

Thomas Rietz

University of Iowa - Henry B. Tippie College of Business

Date Written: June 2008

Abstract

We re-examine preference reversal data from previously published studies to (1) identify the effects of different incentive treatments and (2) determine the models that best explain data patterns across incentive treatments. Contrary to the "folk-wisdom" that incentives do not affect behavior in preference reversal experiments, we find that different incentive treatments do have a clear impact on aligning choices observed in these experiments. While truth revealing incentives do not eliminate reversals, they do align responses so they become consistent with stable preferences reported with error. We demonstrate this in both a model-free context and by using maximum likelihood estimation to test specific behavioral models of choice. Without incentives, models based on task-dependent evaluations of gambles are necessary to explain the data. However, under truth-revealing incentives, models of stable preference expressed with error explain behavior as well as any model possibly could. Thus, our results suggest that incentives change both the overall response pattern and the underlying decision processes of subjects.

Keywords: preference reversal, experimental economics, incentives

JEL Classification: B41, C70, C91, D81

Suggested Citation

Berg, Joyce E. and Dickhaut, John and Rietz, Thomas A., Preference Reversals: The Impact of Truth-Revealing Monetary Incentives (June 2008). Available at SSRN: https://ssrn.com/abstract=887775 or http://dx.doi.org/10.2139/ssrn.887775

Joyce E. Berg

University of Iowa - Henry B. Tippie College of Business ( email )

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John Dickhaut

Chapman University (Deceased)

Thomas A. Rietz (Contact Author)

University of Iowa - Henry B. Tippie College of Business ( email )

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