Ana has reference-dependent preferences over money. Let herutility over money cmoney be given by: U = v(cmoney ? rmoney) wherev(x) = ( x if x ? 0, 2x if x < 0.

Let Ana start with no income, and a reference point of zeromoney. Every day, Ana has the option to invest in stocks. The stockprice changes over the course of the day such that with 50% chance,Ana earns $100 and with 50% chance, Ana loses $60.

(a) Suppose Ana plans on checking her stock portfolio at the endof each day. She will experience gain/loss utility depending onwhether the stock went up or down. What is her expected utility ifshe invests? What is her expected utility if she does not invest?Will Ana invest in stocks?

(b) Suppose Ana plans on checking her stock portfolio every twodays instead. At the end of two days, what are the possible moneyoutcomes that Ana can end up with? What is the likelihood ofeach?

(c) If she checks her stock portfolio every two days, what isher expected utility if she invests? What is her expected utilityif she does not invest? Will Ana invest in stocks?

(d) Explain why financial advisors give advice saying to checkstock balance every once in a while.

(e) Now suppose Ana starts with -$40, and a reference point ofzero money. Ana plans to checks her stock portfolio at the end ofthat day. What is her expected utility if she invests? What is herexpected utility if she does not invest? Will Ana invest instocks?

(f) Explain the intuition as to why your answer here differsfrom part (a).

Answer rating: 100% (QA)

Answer Explanation b E a expected utility since c it can be explained E x V X X fod 20 f v... View the full answer