Experiment (1): in addition to whatever you own, you have been given $400. Now choose between A
Question:
Experiment (1): in addition to whatever you own, you have been given $400. Now choose between A and B.
A = ($200, 0.5)
B = ($100, 1)
Outcome: most experiment subjects choose B.
Experiment (2): in addition to whatever you own, you have been given $600. Now choose between C and D.
C = (-$200, 0.5)
D = (-$100, 1)
Outcome: most experiment subjects choose C.
Required
(a) Discuss the relation between the two choices (A and B) offered in Experiment (1) and the two choices (C and D) offered in Experiment (2)?
(b) What do these two experiments tell us about human behavior tendency that may be different from traditional economic assumptions about rational behavior?
(c) Use the human behavior tendency from the experiment to explain why investors tend to hold on to "loser" stocks?
Expert Answer:
a In Experiment 1 choice A offers a higher amount of money but a lower probability of receiving it w... View the full answer
