Ann is a participant of an experiment. Her value function is S√ v(x) = x ≥ 0 -3√√√|x| x < 0 and her probability-weighting function is 7 (p) = p for any p = [0,1]. In the experiment, Ann is asked to choose between Option 1: receiving a sure $10, and Option 2: a lottery that pays $20 and $0 with equal probability.
Ann is a participant of an experiment. Her value function is S√ v(x) = x ≥ 0 -3√√√|x| x < 0 and her probability-weighting function is 7 (p) = p for any p = [0,1]. In the experiment, Ann is asked to choose between Option 1: receiving a sure $10, and Option 2: a lottery that pays $20 and $0 with equal probability.
Chapter7: Uncertainty
Section: Chapter Questions
Problem 7.1P
Question
Suppose Ann has participated in a different experiment before, and from
that experiment she earned $25. If Ann takes her earning from the previous experiment
as her reference point, which option would she choose according to the prospect theory?
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