3. Causes of Preference Reversal Phenomenon

Chapter 2 provided descriptions of preference reversal phenomenon. This phenomenon was reported first by psychologists such as Lindman (1971) and Lichtenstein and Slovic (Slovic and Lichtenstein 1968; Lichtenstein and Slovic 1971) as the phenomenon of preference relation inconsistency that results from the methods of selection and pricing in gambles. The selection problem of these studies had the test subjects choose between Gamble H with a high winning percentage and a small amount of prize money (i.e., the winning percentage is 28/36 and the prize is $10) and Gamble L with a low winning percentage and a large amount of prize money (i.e., the winning percentage 3/36 and the prize is $100). The pricing question asked how much the lowest probable price at which Gamble H and Gamble L could be sold if the respondents owned them. In most cases, Gamble H was preferred in the selection problem and Gamble L was priced higher than the others in the pricing question (Slovic and Lichtenstein 1983; Slovic 1995; Tversky and Thaler 1990).