Comparing preference reversal for general lotteries and income distributions

Abstract

This paper investigates preference reversals both for lotteries and income distributions as well as their interrelationship. In doing so, it offers several new features: Firstly, it provides a joint analysis of lotteries and income distributions. Secondly, the stimulus material used is considerably more general than used so far in the analysis of preference reversal. Instead of relying on binary lotteries and income distributions, we used ten multiple-outcome lotteries and ten n-dimensional income distributions which corresponded exactly to the lotteries. The lotteries and income distributions were chosen so as to model generalized P-bets (negatively skewed distributions) and generalized $-bets (positively skewed distributions), but we also used other shapes (uniform, symmetrical, and bimodal distributions). Thirdly, we applied material incentives to our subjects which were recruited from students of the Universities of Bari, Italy, and Castellón, Spain. Subjects were asked both to rate and evaluate the ten lotteries or the ten income distributions, respectively. We found heavy response-mode effects which confirm classical preference reversal, and revealed new patterns of preference reversal. Further, the transfer principle was largely violated.