Preference Reversal

Definition

Health Economics

  • Preference reversal is a phenomenon widely observed in experiments designed to test the validity of the assumptions usually taken as underlying economic theories of behaviour (see Utility) and of welfare. In choices between pairs of simple monetary gambles, it has been found that individuals choose bets involving high probabilities of small gains (so-called P-bets) rather than bets offering a smaller chance of a larger prize (so-called $-bets) even though they attach a higher monetary value to the $-bets. This evidence has generated a controversy as to whether the preferences that are assumed to underlie people's choices are better seen as context-free (the usual economic point of view, in which the means through which a preference is elicited is supposed to be irrelevant) or context-sensitive (the usual psychological point of view, in which the experimental means can affect the outcome).
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