The CEO of a firm is giving an annual statement in front of shareholders. The company sells two products. One of the products make a massive loss. The other product makes a very small profit. In his annual statement, the CEO spends disproportionate amount of time on stressing the very small profit. He could for instance have simply added the profit figures from the two products and presented the gross profits (negative in this case), but he did not do that. How can you justify the CEO’s behavior by using prospect theory? Do not use other explanations that do not involve prospect theory.
The CEO of a firm is giving an annual statement in front of shareholders. The company sells two products. One of the products make a massive loss. The other product makes a very small profit. In his annual statement, the CEO spends disproportionate amount of time on stressing the very small profit. He could for instance have simply added the profit figures from the two products and presented the gross profits (negative in this case), but he did not do that. How can you justify the CEO’s behavior by using prospect theory? Do not use other explanations that do not involve prospect theory.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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The CEO of a firm is giving an annual statement in front of shareholders. The company sells two products. One of the products make a massive loss. The other product makes a very small profit. In his annual statement, the CEO spends disproportionate amount of time on stressing the very small profit. He could for instance have simply added the profit figures from the two products and presented the gross profits (negative in this case), but he did not do that. How can you justify the CEO’s behavior by using prospect theory? Do not use other explanations that do not involve prospect theory.
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