Assume that you have a friend who has made a new year's resolution to exercise 10...

  

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Assume that you have a friend who has made a new year's resolution to exercise 10 minutes a day, five days of the week. Your friend says that this would make him happier in the long-run. However, he finds that laziness often gets the better of him and he is not able to abide by his resolution. Your friend doesn't really have any legitimate excuse. He just doesn't feel like exercising. a) What is the name given to the behavioural bias experienced by your friend? (1 mark) b) Why is your friend's behaviour considered to be non-rational? (1 mark) c) What would be an example of a similar type of behaviour on the part of a stock trader? (1 mark) A A A/ My preference for compensation is given by the following utility function u(c) = ln(c) Consider the following two annual compensation packages. Package 1: $60,000 with 100% probability Package 2: $45,000 with 40% probability, and $70,000 with 60% probability a) What is the expected value of the two packages? (Write the package name and the expected value of the package) (2 marks) b) What is the expected utility associated with the two packages? (Write the package name and the expected utility of the package) (2 marks) c) Compute what the probabilities associated with Package 2 should be in order for both Package 1 and Package 2 to have the same expected utility. (2 marks) A/ A/ Assume that you have a friend who has made a new year's resolution to exercise 10 minutes a day, five days of the week. Your friend says that this would make him happier in the long-run. However, he finds that laziness often gets the better of him and he is not able to abide by his resolution. Your friend doesn't really have any legitimate excuse. He just doesn't feel like exercising. a) What is the name given to the behavioural bias experienced by your friend? (1 mark) b) Why is your friend's behaviour considered to be non-rational? (1 mark) c) What would be an example of a similar type of behaviour on the part of a stock trader? (1 mark) A A A/ My preference for compensation is given by the following utility function u(c) = ln(c) Consider the following two annual compensation packages. Package 1: $60,000 with 100% probability Package 2: $45,000 with 40% probability, and $70,000 with 60% probability a) What is the expected value of the two packages? (Write the package name and the expected value of the package) (2 marks) b) What is the expected utility associated with the two packages? (Write the package name and the expected utility of the package) (2 marks) c) Compute what the probabilities associated with Package 2 should be in order for both Package 1 and Package 2 to have the same expected utility. (2 marks) A/ A/