Preference Reversal and Expertise

Subjects in gambling tasks that involve both choice and pricing show a pattern of responses known as preference reversal. That is, although subjects in a choice condition generally will give higher preference ratings to “safe”, high-probability/low-payoff, bets than to “longshot”, low-probability/high-payoff, bets, when they are asked in a pricing condition to generate an amount of money that they would accept to avoid the gamble altogether they tend to give higher values for longshots …

…of Cl as long as that money was guaranteed. In the opposite situation where the potential payoff is the critical factor, L would be favored over H and Cl > Ch. But here, the buyout X would never be accepted because both H and L will always have a greater potential payoff. This results in an underpricing of L and of H, since Cl and Ch will not be any different than L and H respectively.