Consider an investor who has Prospect Theory preferences and exhibits gain seekingness (i.e., his loss aversion...

 

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Consider an investor who has Prospect Theory preferences and exhibits "gain seekingness" (i.e., his loss aversion parameter 2 is less than 1) but doesn't exhibit probability weighting or diminishing sensitivity in gains/losses. He chooses between two assets: (i) asset A pays -1 or +9 relative to the reference point, with probabilities 0.9 and 0.1, respectively, and (ii) asset B pays O relative to the reference point, with probability 1. What is the investor's preference between the two assets? What is driving his behaviour? Consider an investor who has Prospect Theory preferences and exhibits "gain seekingness" (i.e., his loss aversion parameter 2 is less than 1) but doesn't exhibit probability weighting or diminishing sensitivity in gains/losses. He chooses between two assets: (i) asset A pays -1 or +9 relative to the reference point, with probabilities 0.9 and 0.1, respectively, and (ii) asset B pays O relative to the reference point, with probability 1. What is the investor's preference between the two assets? What is driving his behaviour?

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To decide the financial backers inclination between the two resources we want to assess the normal utilities of every choice in light of Prospect Hypo... View the full answer