Ana has reference-dependent preferences over money. Let her utility over money arm',y be given by: if s: &gt; O U=v ermme wherevm: _' (C'm'y...
View the step-by-step solution to:

Question

4. Ana has reference-dependent preferences over money. Let her utility over money arm“,y
be given by: a: if s: &gt; O
U=v e—rmme wherevm: _’
(C’m’y 3&quot;) H {25: ifar&lt;0.
Let Ana start with no income, and a reference point of zero money. Every day, Ana has the option to invest in stocks. The stock price changes over the course of the day
such that with 50% chance, Ana earns \$100 and with 50% chance, Ana loses \$60. (a) Suppose Ana plans on checking her stock portfolio at the end of each day. She
will experience gain / loss utility depending on whether the stock went up or down.
What is her expected utility if she invests? What is her expected utility if she
does not invest? Will Ana invest in stocks? (b) Suppose Ana plans on checking her stock portfolio every two days instead. At the end of two days, what are the possible money outcomes that Ana can end up
with? What is the likelihood of each? (c) If she checks her stock portfolio every two days, what is her expected utility if
she invests? What is her expected utility if she does not invest? Will Ana invest in stocks? ((1) Explain why ﬁnancial advisors give advice saying to check stock balance every
once in a while. (e) Now suppose Ana starts with -\$40, and a reference point of zero money. Ana
plans to checks her stock portfolio at the end of that day. What is her expected
utility if she invests? What is her expected utility if she does not invest? Will
Ana invest in stocks? (f) Explain the intuition as to why your answer here differs from part (a).

### Why Join Course Hero?

Course Hero has all the homework and study help you need to succeed! We’ve got course-specific notes, study guides, and practice tests along with expert tutors.

• ### -

Study Documents

Find the best study resources around, tagged to your specific courses. Share your own to gain free Course Hero access.

Browse Documents