Prospect Theory

•Prospect pair 1 -- choose between:

• –A: (.8, $4,000)

• –B: ( $3,000)

•Prospect pair 2 – choose between:

• –A: (.8, - $4,000)

• –B: ( - $3,000)

•Prospect pair 0 – choose between:

• –A: (.25, $1,000)

• –B: ( $240)

•Prospect pair 0.5 – choose between:

• –A: (.75, - $1,000)

• –B: (- $750)

•Prospect pair 3 --

assume you’re richer by 300$ than you are today

and choose between:

• –A: P5( $100)

• –B: P6( .5, $200)

•Prospect pair 4 –

assume you’re richer by 500$ than you are today

and choose between:

• –A: P7(- $100)

• –B: P8( .5, - $200)

•Prospect pair 5 -- choose between:

• –A: $0 (no prospect)

• –B: (.5, $50, -$50)

•Problem 3

–A: P9(0)    (i.e. no prospect)

–B: P10(.5, x, -$25)

•What value of x would make you indifferent between A and B?

•Prospect pair 6 -- choose between:

• –A: P11(.001, $5,000)

• –B: P12($5)

•Prospect pair 7 -- choose between:

• –A: P13(.001, -$5,000)

• –B: P14(-$5)