Prospect Theory III created 2011.01.31

Prospect Theory III created 2011.01.31 - an agent with a...

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Click to edit Master subtitle style 4/15/11 Prospect Theory Part III
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4/15/11 Savings and Consumption: According to life-cycle/permanent income hypothesis, Consumption should not respond to predictable movements in income. Shea (1995) considers groups of workers whose wages for the next year are set in advance Unionized teachers (contracts negotiated one year ahead) Standard theory prediction
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4/15/11 Criticisms of PT Lack of normative status The determination of reference point Narrow Framing Separation or integration What about the comparison of
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4/15/11 Example Problem P1= ($1000, .5;-$550, .5). Consider
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Unformatted text preview: an agent with a non-decreasing probability weighting function ( p ) and with the following prospect theory value function V ( x ) = { x for x 0 4/15/11 Quiz #3, February 3rd Prospect Theory 1. What is certainty effect, reflection effect, isolation effect? What are the examples? 2. One may argue that certainty effect is because of the aversion to variability/uncertainty. There is an evidence against this argument, what is it? Please explain. 3. What is probabilistic insurance? 4. Explain why unattractiveness of probabilistic insurance can be an evidence against EU?...
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Prospect Theory III created 2011.01.31 - an agent with a...

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