Time to Retire the 1-in-X Risk Format

In the 1970s, psychologists identified an inconsistency in human decision making that had many economists concerned. A series of studies showed that under certain circumstances, people would prefer one type of lottery over another but place a higher monetary value on playing the (seemingly) less preferred lottery. Such preference reversals, as they were called, challenged fundamental assumptions in economics. In an attempt to resolve this issue, two economists, David Grether and Charlie Plott, conducted an extremely rigorous series of experiments designed specifically to try to disprove the existence of preference reversals by identifying and testing different possible explanations for the phenomenon. In 1979, they published their results in the premier economic journal, the American Economic Review. 1 Put simply, despite their best efforts to refute preference reversals, Grether and Plott had to admit that the effect remained and that the field of economics needed to change in order to address it.