A few minutes ago, Joe Doe learned that his company was having a bad year and thus merit salary increases will be smaller than expected. His division’s budget has been set and so he knows that he will receive a salary increase of $400 over his present salary. Joe Doe has also been offered a transfer to another division in the company. He is unsure of the salary situation in the other division. However, his best information leads him to conclude that if he took the new job, there is a 60% chance that he would receive a salary increase of $600 over his present salary, and a 40% chance that he would receive only a $150 increase over his present salary. To summarize, Joe Doe can either stick with his current job and get a salary increase of $400, or take a transfer to a new job and get a salary increase of either $600 with a 60% probability, or $150 with a 40% probability. Amount ($X) Value (v($X)) $0 -5 $150 -2.5 $200 -2 $300 0 $350 0.5 $400 1 $600 1.85 Probability (p) Decision Weight (π(p)) 0.0 0.1 0.1 0.13 0.2 0.15 0.3 0.23 0.4 0.31 0.5 0.39 0.6 0.47 0.7 0.55 0.8 0.63 0.9 0.71 1.0 1.0 Based upon the evidence presented, what do you think Joe Doe is likely to do? That is, do you think expected utility theory or prospect theory is more likely to account for Joe Doe's actual choice in this situation. Why? Explain your reasoning.
A few minutes ago, Joe Doe learned that his company was having a bad year and thus merit salary increases will be smaller than expected. His division’s budget has been set and so he knows that he will receive a salary increase of $400 over his present salary. Joe Doe has also been offered a transfer to another division in the company. He is unsure of the salary situation in the other division. However, his best information leads him to conclude that if he took the new job, there is a 60% chance that he would receive a salary increase of $600 over his present salary, and a 40% chance that he would receive only a $150 increase over his present salary. To summarize, Joe Doe can either stick with his current job and get a salary increase of $400, or take a transfer to a new job and get a salary increase of either $600 with a 60% probability, or $150 with a 40% probability.
| Amount ($X) | Value (v($X)) |
| $0 | -5 |
| $150 | -2.5 |
| $200 | -2 |
| $300 | 0 |
| $350 | 0.5 |
| $400 | 1 |
| $600 | 1.85 |
| Probability (p) | Decision Weight (π(p)) |
| 0.0 | 0.1 |
| 0.1 | 0.13 |
| 0.2 | 0.15 |
| 0.3 | 0.23 |
| 0.4 | 0.31 |
| 0.5 | 0.39 |
| 0.6 | 0.47 |
| 0.7 | 0.55 |
| 0.8 | 0.63 |
| 0.9 | 0.71 |
| 1.0 | 1.0 |
Based upon the evidence presented, what do you think Joe Doe is likely to do? That is, do you think expected utility theory or prospect theory is more likely to account for Joe Doe's actual choice in this situation. Why? Explain your reasoning.
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