Evaluate risky decisions using prospect theory

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Reference no: EM132199015

Question: Dwayne and Andre are quite certain that they evaluate risky decisions using Prospect Theory. They are told by a researcher that their decisions reflect a decision weighting function w (p) = p^y / (p^y+(1-p)^y)^1/y

a) If Michael evaluates risky decisions using expected utility, what is Michael's y?

b) The researcher tells Dwayne that his value of y is greater than Andre's. Who will assign greater weight to a very low probability, say p=0.05? Who will assign greater weight to a very high probability, say p=0.9 ? Justify your answer.

c) Andre's claims his value function is v(x) =3x^0.5 if x>0 and v(x) = -(-x)^0.5 if x < 0 . If Andre really does evaluate risky decisions using Prospect Theory, do you believe his claim? Why or why not?

Reference no: EM132199015

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