Tversky and Kahneman asked 72 respondents to choose between lottery 1 and lottery 2 and lottery 3 and lottery 4.
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Lottery 1: |
A .001 chance at winning $5,000 and a .999 chance of winning $0 |
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Lottery 2: |
A sure gain of $5 |
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Lottery 3: |
A .001 chance of losing $5,000 and a .999 chance of losing $0 |
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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 decisionmaker?
b Which choices would be made by a risk seeking decision maker?
c How does the observed behavior of the participants contradict expected utility maximization?
d How does prospect theory resolve the contradiction?