Preference Reversals: The Impact of Truth-Revealing Monetary Incentives

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.