Consider the following re-weighting function in the prospect theory framework f(x) = ex 4 0 1...

 

Transcribed Image Text:

Consider the following re-weighting function in the prospect theory framework f(x) = ex 4 0 1 x = (0, 1) x = 0 x = 1 and the lotteries L₁ (.95, 300; .05, 100) and L2 = (.8, 300; .2, 100). Suppose for simplicity that u(x) = x. (a) What is the relation between lottery 1 and lottery 2? (b) In the original formulation of prospect theory, what would be the evaluation of L1 and L2? If the DM follows this evaluation, which lottery would the DM choose? (c) What is the evaluation of L1 and L2 under CPT? What would the DM choose with the CPT model? Consider the following re-weighting function in the prospect theory framework f(x) = ex 4 0 1 x = (0, 1) x = 0 x = 1 and the lotteries L₁ (.95, 300; .05, 100) and L2 = (.8, 300; .2, 100). Suppose for simplicity that u(x) = x. (a) What is the relation between lottery 1 and lottery 2? (b) In the original formulation of prospect theory, what would be the evaluation of L1 and L2? If the DM follows this evaluation, which lottery would the DM choose? (c) What is the evaluation of L1 and L2 under CPT? What would the DM choose with the CPT model? Consider the following re-weighting function in the prospect theory framework f(x) = ex 4 0 1 x = (0, 1) x = 0 x = 1 and the lotteries L₁ (.95, 300; .05, 100) and L2 = (.8, 300; .2, 100). Suppose for simplicity that u(x) = x. (a) What is the relation between lottery 1 and lottery 2? (b) In the original formulation of prospect theory, what would be the evaluation of L1 and L2? If the DM follows this evaluation, which lottery would the DM choose? (c) What is the evaluation of L1 and L2 under CPT? What would the DM choose with the CPT model? Consider the following re-weighting function in the prospect theory framework f(x) = ex 4 0 1 x = (0, 1) x = 0 x = 1 and the lotteries L₁ (.95, 300; .05, 100) and L2 = (.8, 300; .2, 100). Suppose for simplicity that u(x) = x. (a) What is the relation between lottery 1 and lottery 2? (b) In the original formulation of prospect theory, what would be the evaluation of L1 and L2? If the DM follows this evaluation, which lottery would the DM choose? (c) What is the evaluation of L1 and L2 under CPT? What would the DM choose with the CPT model?

Answer rating: 100% (QA)

a Lottery 1 L1 is more likely to win 300 than lottery 2 L2 This is because L1 has a 95 chance of win... View the full answer