ProspectTheory2

ProspectTheory2 - Recap Modeling Reference-Dependence...

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Recap Modeling Reference-Dependence Example Modeling Reference-Dependent Preferences (Part I) January 6, 2011
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Recap Modeling Reference-Dependence Example Risk Aversion Schizophrenia Suppose u ( w ) = - e - . 0000166 w (CARA). independent of initial w . Accept or reject? 1. 50-50 lose $10,000, gain $12,000 2. 50-50 lose $50,000, gain $8,000,000 3. $50.25 premium for full-insurance against 10% chance of $500 loss Is this person risk-averse or not?
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Recap Modeling Reference-Dependence Example Prospect Theory: Recap Value function carries Risk aversion Loss aversion Diminishing sensitivity Probability-weighting function Overweights small probabilities Features certainty premium
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Recap Modeling Reference-Dependence Example Prospect Theory Prospect Theory
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Recap Modeling Reference-Dependence Example Towards a Simple Model Most applications ignore π ( p ) Focus on RD, LA, DS (concave in gains, convex in losses);
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ProspectTheory2 - Recap Modeling Reference-Dependence...

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