Question

Q-1)

According to the Prospect Theory, consequences are valued in the terms of changes from the _________, values of gain or losses have ________ returns, and losses tend to be weighted ____ than gains.

Q-2)

Using the concepts of utility theory and prospect theory, describe risk averse behavior.

Answer 1

1.

Correct Answer:

Reference level

different or diminishing

more heavily

Here, the reference level of point is the base level, from that the changes are observed. People tend to weigh more heavily than the gains and try to go for the certain gains.

2.

As per the given theory, risk averse behavior refers to the behavior of choosing a certain gain over the scope of getting more gain, but involving some amount of risk. Here, individuals take gains and losses differently and prefer to take decisions on the basis of gains. Further, it also uses the diminishing marginal utility and as the wealth increases, people tend to opt for the certain gains, rather gains with the higher risk.