(a) Carefully comment on the picture below, which represents the value functionaccording to prospect theory.ے۔LOSSES]VALUEGAINS(b) What is the endowment effect in the Kahneman, Knetsch and Thaler (1990)coffee mug experiment? Illustrate how they are able to explain the endow-ment effect by assuming reference dependent preferences and loss aversion.(c) Briefly discuss how prospect theory may account for the so called 'dispositioneffect' in financial markets. [1

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(a) Carefully comment on the picture below, which represents the value function according to prospect theory. 1

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Chapter1: Making Economics Decisions

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Question

(a) Carefully comment on the picture below, which represents the value function
according to prospect theory.
ے۔
LOSSES
]
VALUE
GAINS
(b) What is the endowment effect in the Kahneman, Knetsch and Thaler (1990)
coffee mug experiment? Illustrate how they are able to explain the endow-
ment effect by assuming reference dependent preferences and loss aversion.
(c) Briefly discuss how prospect theory may account for the so called 'disposition
effect' in financial markets. [
1

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