BE 1: Prospect theory 0.0 / 5 ? Economicsbehavioural economicsUniversityAll boards Created by: charlieCreated on: 30-04-18 11:26 Standard expected utility model + 9. Assumptions 1) Rational: Completeness 2) Rational: Transitive 3) Continuity 4) Independence 5) Convexity 6) Monotonicity 7) Linear in probability 1 of 18 Standard expected utility model: Assumption 1 Rational: Completeness (well-defined preferences) 2 of 18 Standard expected utility model: Assumption 2 Rational: Transitive (consistent preferences) 3 of 18 Standard expected utility model: Assumption 3 Continuity (mix of A + C making indifferent with B) 4 of 18 Standard expected utility model: Assumption 4 Independence (maintain order of preferences when presented with new choice) 5 of 18 Standard expected utility model: Assumption 5 Convexity (diminishing MRS/ risk averse) 6 of 18 Standard expected utility model: Assumption 6 Monotonicity (more preferred to less) 7 of 18 Standard expected utility model: Assumption 7 Linear in probability weights 8 of 18 Standard expected utility model: Assumption 8 Utility defined over final wealth 9 of 18 Standard expected utility model: Assumption 9 Preferences independent from way they're described (no framing effects) 10 of 18 Puzzle 1: Utility function 1) Individuals reason in terms of L + G 2) Loss Aversion: 11 of 18 Puzzle 2: Probabilities 1) Non-linear decision weights (Allais Paradox): 12 of 18 Prospect theory: Patch 1: The function 1) Reason in terms of L + G (principle of diminishing sensitivity) 2) Loss Aversion (kink) 13 of 18 Prospect theory: Patch 2: The probability weights 1) Non-linear decision weights (principle of diminishing sensitivity) 14 of 18 Empirics: Mug Experiment WTA > WTP (endowment effect + loss aversion) 15 of 18 Empirics: Disposition effect PGR < PLR (loss aversion) 16 of 18 Empirics: NY Cab Drivers Work less on rainy days (loss aversion + narrow bracketing) 17 of 18 Empirics: Mental accounting for the poor People MPC largest under 'current account' (framing effect + loss aversion) 18 of 18
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