Suppose that Winnie the Pooh and Eeyore have the same value function: v(x) = x1/2 for gains and v(x) = -2(|x|)1/2 for losses. The two are also facing the same choice, between (S) $1 for sure and (G) a gamble with a 25% chance of winning $4 and a 75% chance of winning nothing. Winnie the Pooh and Eeyore both subjectively weight probabilities correctly. Winnie the Pooh codes all outcomes as gains; that is, he takes as his reference point winning nothing. For Pooh: What is the value of S? What is the value of G? Which would he choose? Eeyore codes all outcomes as losses; that is, he takes as his reference point winning $4. For Eeyore: What is the value of S? What is the value of G? Which would he choose?
Suppose that Winnie the Pooh and Eeyore have the same value function: v(x) = x1/2 for gains and v(x) = -2(|x|)1/2 for losses. The two are also facing the same choice, between (S) $1 for sure and (G) a gamble with a 25% chance of winning $4 and a 75% chance of winning nothing. Winnie the Pooh and Eeyore both subjectively weight probabilities correctly.
Winnie the Pooh codes all outcomes as gains; that is, he takes as his reference point winning nothing. For Pooh: What is the value of S? What is the value of G? Which would he choose?
Eeyore codes all outcomes as losses; that is, he takes as his reference point winning $4. For Eeyore: What is the value of S? What is the value of G? Which would he choose?
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