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

Question: 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

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

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Okay got it Heres the expanded solution a Loss Aversion Loss aversion refers to the tendency of people to strongly prefer avoiding losses to acquiring ... View full answer

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