Concave utility function, Econometrics

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Brie?y describe the preference reversal phenomenon, and explain how Grether and Plott's (1979) experimental design deals with anchoring as one of its possible causes.

Using a drawing of a concave utility function, demonstrate how expected utility the ory cannot explain preference for an 80% chance of losing $4,000 to a sure loss of $3,000.  This example is taken from problem 3' in Kahneman and Tversky's 1979 paper on Prospect Theory.


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