Financial Economics

profilessog68

 

1. Draw a graph of the value function used in Prospect Theory. Carefully label the graph, and explain each part of it and how it differs from a typical utility function used in expected utility theory. Give an example of an experimental result (such as one from the paper) or a real life example to motivate this value function, and why it might be more realistic than a utility function consistent with expected utility theory.

 

2. For each of the following mental operations, determine whether they would be more likely to be performed by System 1 or System 2, and explain your choice:

·         Checking the validity of a complex logical argument

·         Detecting hostility in the facial expression of another person

·         Counting the number of times the letter “a” appears on this page

·         Avoiding thinking about spiders

 

·         Computing 2 x 3 = ?

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