Preference Reversals and Induced Risk Preferences: Evidence for Noisy Maximization

We combine two research lines: preference reversal research (Lichtenstein and Slovic, 1971) and research on lottery-based risk preference induction (Roth and Malouf, 1979). Our results are informative for both research lines. We show that inducing risk preferences in preference reversal experiments has dramatic effects. First, while our subjects still display reversals, they do not display the usual pattern of predicted reversals suggested by the compatibility hypothesis. By inducing risk averse and risk loving preferences, we can dramatically reduce reversal rates and even produce the opposite pattern of reversals. Our results are consistent with the assumption that subjects maximize expected utility with error. This provides evidence that Camerer and Hogarth's (1999) framework for incentive effects can be extended to include the risk preference induction reward scheme.