Question: Question 2: Consider a simplified version of Prospect Theory with no probability weights (w(p) = p for all p). What pattern of risk preferences would

Question 2: Consider a simplified version of Prospect Theory with no probability weights (w(p) = p for all p). What pattern of risk preferences would the theory predict for:

(a)simple prospects involving some probability of a gain, and

(b)simple prospects involving some probability of a loss?

Illustrate your explanation using an example of a simple prospect of each type.

c)What are the qualitative features of the Prospect Theory probability weighting function? Use a drawing to illustrate your answer.

d)How do the probability weights used in prospect theory change the pattern of risk-seeking and risk-aversion as compared with the version of Prospect Theory in part a-b of this question?

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