THE PREFERENCE REVERSAL PHENOMENON - RESPONSE-MODE, MARKETS AND INCENTIVES

This paper addresses the apparent conflict between the results of expe riments on individual choice and judgement and the results of market e xperiments. Data are reported for experiments designed to analyze the effects of (a) economic incentives, repetition, feedback and informati on and (b) choice and valuation response modes on (c) subjects' decisi ons in paired market and nonmarket environments. Causes of divergent m arket and nonmarket behavior are identified in the context of the pref erence reversal phenomenon (PRP). Study of the PRP is extended to two types of market environments. The PRP is observed on the first repetit ion in a market setting (second price auction) with immediate feedback , both with and without financial incentives. However, after five repe titions of the auction, the subjects' bids are generally consistent wi th their choices and the asymmetry between the rates of predicted and unpredicted reversals disappears. An individual pricing task using the BDM mechanism yields similar results on the first repetition but resu lts which differ from the second price auction on the fifth repetition . Choice tasks produce lower rates of reversals than do pricing tasks in both market and individual decision making settings.