Tversky and Kahneman asked 72 respondents to choosebetween lottery 1 and lottery 2 and lottery 3 and lottery 4.Lottery 1: A .001 chance at winning $5,000 and a.999 chance of winning $0Lottery 2: A sure gain of $5Lottery 3: A .001 chance of losing $5,000 and a .999 chance of losing $0Lottery 4: A sure loss of $5More than 75% of all participants preferred lottery 1 tolottery 2 and lottery 4 to lottery 3. a Which choices would be made by a risk-averse deci-sion maker? b Which choices would be made by a risk-seeking de-cision maker? c How does the observed behavior of the participantscontradict expected utility maximization?d How does prospect theory resolve the contradiction?
Tversky and Kahneman asked 72 respondents to choose
between lottery 1 and lottery 2 and lottery 3 and lottery 4.
Lottery 1: A .001 chance at winning $5,000 and a
.999 chance of winning $0
Lottery 2: A sure gain of $5
Lottery 3: A .001 chance of losing $5,000 and a
.999 chance of losing $0
Lottery 4: A sure loss of $5
More than 75% of all participants preferred lottery 1 to
lottery 2 and lottery 4 to lottery 3.
a Which choices would be made by a risk-averse deci-
sion maker?
b Which choices would be made by a risk-seeking de-
cision maker?
c How does the observed behavior of the participants
contradict expected utility maximization?
d How does prospect theory resolve the contradiction?
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