Scandinavian Working Papers in Economics

CERE Working Papers,
CERE - the Center for Environmental and Resource Economics

No 2015:9: Preference Cloud Theory: Imprecise Preferences and Preference Reversals

Oben K. Bayrak () and John D. Hey ()
Additional contact information
Oben K. Bayrak: CERE and Department of Forest Economics, SLU, Postal: Skogsmarksgränd, Umeå, 901 83, Sweden
John D. Hey: Department of Economics, University of York, Postal: Heslington, York, YO1 10DD, Great Britain

Abstract: This paper presents a new theory, called Preference Cloud Theory, of decision-making under uncertainty. This new theory provides an explanation for empirically-observed Preference reversals. Central to the theory is the incorporation of preference imprecision which arises because of individuals’ vague understanding of numerical probabilities. We combine this concept with the use of the Alpha model (which builds on Hurwicz’s criterion) and construct a simple model which helps us to understand various anomalies discovered in the experimental economics literature that standard models cannot explain.

Keywords: Imprecise Preferences; Preference Reversals; Decision under Uncertainty; Anomalies in Expected Utility Theory

JEL-codes: D81

11 pages, September 8, 2015

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