Consider an experiment in which subjects were randomly given either a mug or a pen, and were told that they owned the item they were given and could take it home at the end of the experiment. Approximately half the subjects (Group 1) were told that they would have a 90% probability of being able to exchange their object for the other one at the end of the experiment, and the rest (Group 2) were told that they would have a 10% chance of being able to exchange their object. Then, subjects filled out a time-consuming survey, the content of which is unimportant for this question. Finally, subjects were asked whether they want to exchange if given the chance. Moreover, before running the experiment, the researchers did a survey suggesting that half of the subjects prefer the mug and half of the participants prefer the pen.1(a) In a neoclassical model (with no reference dependence), approx- imately what percentage of subjects should want to exchange in each group?(b) In a prospect-theory model with the reference point being the status quo, in which group should a larger percentage of subjects want to exchange?

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Answered: Consider an experiment in which…

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Chapter1: Combinatorial Analysis

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Consider an experiment in which subjects were randomly given either a mug or a pen, and were told that they owned the item they were given and could take it home at the end of the experiment. Approximately half the subjects (Group 1) were told that they would have a 90% probability of being able to exchange their object for the other one at the end of the experiment, and the rest (Group 2) were told that they would have a 10% chance of being able to exchange their object. Then, subjects filled out a time-consuming survey, the content of which is unimportant for this question. Finally, subjects were asked whether they want to exchange if given the chance. Moreover, before running the experiment, the researchers did a survey suggesting that half of the subjects prefer the mug and half of the participants prefer the pen.
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(a) In a neoclassical model (with no reference dependence), approx- imately what percentage of subjects should want to exchange in each group?
(b) In a prospect-theory model with the reference point being the status quo, in which group should a larger percentage of subjects want to exchange?

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