Preference Reversals




Preference Reversals Definition

Preference reversals refer to the observation that there are systematic changes in people’s preference order between options. Preference order refers to an abstract relation between two options. It is assumed that when an individual is presented with options A and B, he or she either prefers A to B or prefers B to A (or is indifferent between A and B). Systematic changes refer to the observation that people exhibit different or even reverse preferences for the same options in normatively equivalent evaluation conditions (i.e., conditions that differ at first sight but in which the options that people are presented with have essentially remained the same).

Preference Reversals History and Background

Preference ReversalsThe preference reversal phenomenon was first observed in the late 1960s and the early 1970s by Sarah Lichtenstein and Paul Slovic in a gambling context. They observed that if people are asked to choose between a relatively safe bet with a low payoff and a relatively risky bet with a high payoff, and if they are asked to indicate their selling prices if they were to sell these very lotteries, people’s choice ordering is systematically different from their price ordering. More specifically, people tend to state a preference for the safer bet but tend to state a higher selling price for the riskier one. Very soon, this finding was replicated several times.

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Although the theoretical concept of preferences as an abstract relation between two options seems very clear and natural, this abstract relation is a psychological construct that must be operationalized or measured by some observable behavior. Researchers have introduced multiple elicitation methods or methods that enabled them to observe decision makers’ preferences. Besides asking individuals to choose among different options or to indicate how much they are willing to accept to forego or sell an option (i.e., willingness to accept), people have been asked to indicate how much they are willing to pay to obtain an option (i.e., willingness to pay), to state a price that is considered to be equivalent to an option (i.e., a certainty equivalent), or to give the probability of winning an option that is considered equivalent to another option (i.e., a probability equivalent). Researchers then use this information to rank order people’s preferences. Consistently, the rank order of preferences produced by one measurement method did not correspond with the rank order produced by a second measurement method. In other words, systematic preference reversals were found repeatedly.

In addition, the preference reversal phenomenon has not stopped at lotteries. Rather than being a peculiar characteristic of a choice between bets, it has been found to be an example of a general pattern. Research has also shown preference reversals when options offering a certain but delayed outcome are used. When faced with a choice between delayed payments, decision makers often select the short-term option but assign a higher certainty equivalent to the long-term option. Different descriptions of the same problem also cause individuals to exhibit different preferences.

Nowadays, preference reversals are firmly established as robust phenomena. Contrary to what researchers assumed originally, preferences do depend on the method of elicitation (i.e., there is no procedure invariance) and they do depend on how the options are described (i.e., there is no description invariance). Rather than trying to eliminate the preference reversal phenomenon as they tend to have done in the past, researchers are now trying to explain it.

Context and Importance of Preference Reversals

The study of preference reversals has led to a conception of preferences that differs from the classical assumption that decision makers have a stable preference order for all options under consideration and consistently select the option highest in that order. An ever-growing body of evidence suggests that the so-called assumption of context-free preferences is not tenable. Instead, preferences appear to be context-specific. The preference reversal phenomenon has contributed to knowledge that decision making is a constructive process. Preferences are often constructed in the elicitation process, rather than only being revealed. This new conception of preferences particularly applies to judgments and choices among options that are important, complex, and perhaps unfamiliar or novel, such as careers and cars for instance. It has been shown empirically that people display more preference reversals for options that they are unfamiliar with. Especially in these circumstances, preferences are not simply read off some master list but are constructed on the spot by an adaptive decision maker.

Different construction can easily lead to different choices. One important construction strategy that has received a lot of empirical attention is so-called anchoring and adjustment, meaning that when decision makers state a price for a given option, they “anchor” on the highest possible outcome. Subsequently, decision makers adjust downward from this anchor toward the true value. If these adjustments are insufficient, then preference reversals can occur. Another important construction strategy is to focus on the most important attribute in the decision process and to select the alternative that is superior on it. This prominent attribute weighs more heavily in choice than in other elicitation procedures.

Preference Reversals Implications

One area of research in which the preference reversal phenomenon might be of particular importance is the study of consumer behavior, and, more specifically, consumer choice making. Consumers, like other decision makers, will have to construct product preferences right on the spot. This means that product preferences might reverse depending on numerous contextual factors such as product descriptions and time pressure.

References:

  1. Bettman, J. R., Luce, M. F., & Payne, J. W. (1998). Constructive consumer choice processes. Journal of Consumer Research, 25, 187-217.
  2. Lichtenstein, S., & Slovic, P. (1973). Response-induced reversals of preference in gambling—Extended replication in Las Vegas. Journal of Experimental Psychology, 101, 16-20.