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, or B) 50% chance jority chose option to wir B. This

, or B) 50% chance jority chose option to wir B. This

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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In an experiment on risk aversion, a group of people were given the following choice: A) Lose $100 with certainty, or B) 50% chance to win $50, 50% chance to lose $200. An overwhelming majority chose option B. This can be best explained by which of the following? Option B has a smaller expected loss than option A. Option B has an expected gain as opposed to certain loss with option A. This behavior violates the Weak Axiom of Revealed Preference. People have a greater aversion to loss than to risk. This behavior is consistent with risk aversion with losses.
Transcribed Image Text:In an experiment on risk aversion, a group of people were given the following choice: A) Lose $100 with certainty, or B) 50% chance to win $50, 50% chance to lose $200. An overwhelming majority chose option B. This can be best explained by which of the following? Option B has a smaller expected loss than option A. Option B has an expected gain as opposed to certain loss with option A. This behavior violates the Weak Axiom of Revealed Preference. People have a greater aversion to loss than to risk. This behavior is consistent with risk aversion with losses.
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