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How can weighting function in prospect theory

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Question

Imagine Professor Sundali is heading to California for a youth soccer tournament. When he stops to buy gas at the local quick stop he purchases a $1 lottery ticket with a jackpot of $40 million. Professor Sundali knows the odds of winning the lottery are about 1 in 50 million. When he gets home he gets his bill for fire insurance on his house. He pays the $500 bill immediately even though he knows the probability of a fire destroying his $200,000 home is only 0.002 (about 2 in 1000). How can the weighting function in Prospect Theory explain why Professor Sundali would purchase both a lottery ticket and fire insurance?

Reference no: EM133441455

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