Question 5: On day 1, Jie has to decide his investment plan. He has two options:...

 

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Question 5: On day 1, Jie has to decide his investment plan. He has two options: Option I and Option II. The two options will provide him with different payoff flows according to the following table. Suppose Jie's initial wealth level is 0 and his reference point is 0. Option I is flexible so that Jie can quit at any time after he chooses to join this option. However, Option II is inflexible in the sense that Jie cannot quit once he chooses to join this option. For both options, Jie can choose to join at any day. Jie is risk neutral and is extremely patient (8-1). Option I Option II 1 Day 1 a with prob. 0.5 and -2 with prob. 0.5 Day 2 1 b with prob. 0.5 and -2 with prob. 0.5 c with prob. 0.5 and -2 with prob. 0.5 Day 3 1 Day n (n>3) 0 0 A. If Jie does not have any present bias (3-1) and he is not loss averse at all (2=1), how is he going to make his dynamic investment plan? (You should specify on each day what Jie's choice is and provide the reasoning.) Question 5: On day 1, Jie has to decide his investment plan. He has two options: Option I and Option II. The two options will provide him with different payoff flows according to the following table. Suppose Jie's initial wealth level is 0 and his reference point is 0. Option I is flexible so that Jie can quit at any time after he chooses to join this option. However, Option II is inflexible in the sense that Jie cannot quit once he chooses to join this option. For both options, Jie can choose to join at any day. Jie is risk neutral and is extremely patient (8-1). Option I Option II 1 Day 1 a with prob. 0.5 and -2 with prob. 0.5 Day 2 1 b with prob. 0.5 and -2 with prob. 0.5 c with prob. 0.5 and -2 with prob. 0.5 Day 3 1 Day n (n>3) 0 0 A. If Jie does not have any present bias (3-1) and he is not loss averse at all (2=1), how is he going to make his dynamic investment plan? (You should specify on each day what Jie's choice is and provide the reasoning.)

Answer rating: 100% (QA)

ANSWERS Jie will invest in Option I on Day 1 and will cont... View the full answer