A simplified prospect theory value function with x representing changes in wealth can be written as...

 

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A simplified prospect theory value function with x representing changes in wealth can be written as follows: V(x)= x/2 V(x) = -2(-x)/2 x20 x <0 a) What is loss aversion? Explain how the above function takes loss aversion into account. [10 marks] b) An investor is considering prospects P1 and P2: P1(0.5, 0, 100) P2(1, 25) (0.5) = 0.44, (1)=1 Using the above value function and the given decision weights, which prospect would she choose? Comment on your answer. [20 marks] c) i) Now an investor is considering P3 and P4: P3(0.001, 9000) P4(1,9) (0.001)= 0.011, (1) = 1 Using the above value function and the given decision weights, which prospect would she choose? Comment on your answer. ii) Now she is considering P5 versus P6: P5(0.001, -9000) P6(1, -9) (0.001) = 0.011, (1) = 1 Using the above value function and the given decision weights, which prospect would she choose? Comment on your answer. A simplified prospect theory value function with x representing changes in wealth can be written as follows: V(x)= x/2 V(x) = -2(-x)/2 x20 x <0 a) What is loss aversion? Explain how the above function takes loss aversion into account. [10 marks] b) An investor is considering prospects P1 and P2: P1(0.5, 0, 100) P2(1, 25) (0.5) = 0.44, (1)=1 Using the above value function and the given decision weights, which prospect would she choose? Comment on your answer. [20 marks] c) i) Now an investor is considering P3 and P4: P3(0.001, 9000) P4(1,9) (0.001)= 0.011, (1) = 1 Using the above value function and the given decision weights, which prospect would she choose? Comment on your answer. ii) Now she is considering P5 versus P6: P5(0.001, -9000) P6(1, -9) (0.001) = 0.011, (1) = 1 Using the above value function and the given decision weights, which prospect would she choose? Comment on your answer.

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