Suppose you must choose between the two prospects, (40,000, 0.025) or (1,000): The prospect of winning 40,000 with a probability of 2.5% or winning 1,000 with certainty. Suppose, too, that the following three graphs represent your utility function (according to expected utility theory) and your weighting and value scales (according to prospect theory). Finally, suppose that your current wealth is 20,000. a. What is the expected utility for the two prospects? b. Based on expected utility theory, which prospect would you choose? Why? c. According to prospect theory, what are the values for each of the prospects? d. Based on prospect theory, which prospect would you choose? Why? e. Why is your decision different under the two theories? (Hint: what is one of the common human traits that prospect theory captures that expected utility theory cannot?)
Suppose you must choose between the two prospects, (40,000, 0.025) or (1,000): The prospect of winning 40,000 with a probability of 2.5% or winning 1,000 with certainty. Suppose, too, that the following three graphs represent your utility function (according to expected utility theory) and your weighting and value scales (according to prospect theory). Finally, suppose that your current wealth is 20,000.
a. What is the expected utility for the two prospects?
b. Based on expected utility theory, which prospect would you choose? Why?
c. According to prospect theory, what are the values for each of the prospects?
d. Based on prospect theory, which prospect would you choose? Why?
e. Why is your decision different under the two theories? (Hint: what is one of the common human traits that prospect theory captures that expected utility theory cannot?)
![Expected Utility
280
265
200
170
165
100
20,000
60,000
40,000
80,000
21,000
Wealth
Utils](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F58a386a0-ae96-45f8-b389-fb38c4a62a15%2Fb446de16-d091-4fd6-8166-d3f656e0dcba%2Fa3oa9cd_processed.jpeg&w=3840&q=75)
![Weighting Function
1.0
0.75
0.50
0.25
0.12
0.025
0.25
0.50
0.75
1.0
Probability
Value Function
80
70
50
8.
Losses
Gains
-60,000
40.000
-20,000
1000
20.000
40,000
60,000
-10
-20
Decision Weights](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F58a386a0-ae96-45f8-b389-fb38c4a62a15%2Fb446de16-d091-4fd6-8166-d3f656e0dcba%2Fde26m5p_processed.jpeg&w=3840&q=75)
![](/static/compass_v2/shared-icons/check-mark.png)
Trending now
This is a popular solution!
Step by step
Solved in 2 steps
![Blurred answer](/static/compass_v2/solution-images/blurred-answer.jpg)
![ENGR.ECONOMIC ANALYSIS](https://compass-isbn-assets.s3.amazonaws.com/isbn_cover_images/9780190931919/9780190931919_smallCoverImage.gif)
![Principles of Economics (12th Edition)](https://www.bartleby.com/isbn_cover_images/9780134078779/9780134078779_smallCoverImage.gif)
![Engineering Economy (17th Edition)](https://www.bartleby.com/isbn_cover_images/9780134870069/9780134870069_smallCoverImage.gif)
![ENGR.ECONOMIC ANALYSIS](https://compass-isbn-assets.s3.amazonaws.com/isbn_cover_images/9780190931919/9780190931919_smallCoverImage.gif)
![Principles of Economics (12th Edition)](https://www.bartleby.com/isbn_cover_images/9780134078779/9780134078779_smallCoverImage.gif)
![Engineering Economy (17th Edition)](https://www.bartleby.com/isbn_cover_images/9780134870069/9780134870069_smallCoverImage.gif)
![Principles of Economics (MindTap Course List)](https://www.bartleby.com/isbn_cover_images/9781305585126/9781305585126_smallCoverImage.gif)
![Managerial Economics: A Problem Solving Approach](https://www.bartleby.com/isbn_cover_images/9781337106665/9781337106665_smallCoverImage.gif)
![Managerial Economics & Business Strategy (Mcgraw-…](https://www.bartleby.com/isbn_cover_images/9781259290619/9781259290619_smallCoverImage.gif)