Magnitude Effects in Preference Reversals

The finding that individual preferences are systematically inconsistent under different but formally equivalent modes of information processing is called the preference reversal (PR). The present research extended previously limited studies on magnitude effects of gains on PR by examining this effect with both gains and losses. Experiment 1 progressively manipulated the payoff variations in bet pairs to measure the effect of ratio scales on risk preferences and PR. Undergraduates (N = 137) were asked to choose a bet they prefer from a list of bet pairs, and then to evaluate the bets indicating how much they were willing to pay for a chance to participate in each of the bets. We observed a robust dichotomous pattern of choice behavior: The majority of choices are consistent with risk aversion or risk-seeking behavior when loss ratios between bet pairs are low and high, respectively. Moreover, different patterns of PR can be elicited with these loss stakes. Experiment 2 examined the predictions of three decision-making heuristics, namely a novel simplified approach called the loss-averse rule, the majority rule, and the equate-to-differentiate rule, as well as cumulative prospect theory that individuals may use in binary choice. Participants (N = 113) were asked to choose a bet from a list of bet pairs. We found that when the loss ratio is high, proportions of choices were in the direction predicted by cumulative prospect theory and the loss-averse rule of decision rather than by the other two rules, at both the conditional and aggregate levels. These results may suggest that when loss risk reaches a level of threshold, risk behavior for binary choices on lotteries is ubiquitously influenced by loss aversion. The overall results indicate the fragile, context-dependent nature of PR phenomenon.