Why is effective duration preferred for callable bonds?

Callable bonds can have expected cash flows that change when rates change. If rates fall, the issuer is more likely to call the bond, which shortens the investor's expected cash-flow horizon and limits price upside. Modified duration assumes cash flows stay fixed, so it can be misleading for callable bonds.

Effective duration estimates price sensitivity using model prices when the benchmark curve shifts up and down. Because those modeled prices can reflect changed expected cash flows, effective duration is the better measure for bonds with embedded options.