1. Why prospect theory predicts that security prices will differ from their prices under efficient securities market theory? (4 marks)
2. Draw the Prospect theory utility function. Explain how the rate of decline in utility for losses differs from the rate of utility increase for gains. (6 marks)
3. The Framework drops the word "rational" as a description of investor and creditor decision-making. List two Behavioural characteristics that predict investor's under-reaction to the full information content of financial statements. (4 marks)
4. If investors do not make rational decisions, does this increase or decrease the role of financial reporting in providing useful information to investors? Explain. (4 marks)