Question

Suppose that you own some stocks in Netflix, the market value of the stocks just dropped from £130 to £100. Your value function is v(x) = x for gains and v(x) = 4x for losses. Suppose that your reference point is £110 given the performance the other comparable firms. How large is the change in your value?

Select one:

a. My value decreased by 50.

b. My value decreased by 60.

c. My value decreased by 30.

d. My value decreased by 120.

e. My value decreased by 20.

Suppose that you own some stocks in Netflix, the market value of the stocks just dropped from £120 to £100. Your value function is v(x) = x for gains and v(x) = 4x for losses. Suppose that your reference point is £160, since the overall market is doing really well. How large is the change in your value?

Select one:

a. My value decreased by 40.

b. My value decreased by 120.

c. My value decreased by 20.

d. My value decreased by 80.

e. My value decreased by 100.

Answer 1

the value functionis defined in terms of gains and losses relative to a psychlogically neutral refference point.

the subjective difference between gaining nothing and gaining $100 is gteater then the difference between gaining 100 and gaining 200,.so the value function is steeper for loss than gains .

so here in this case as because the reference point is $110 and the stock value dropped from 130 to 100 my value will be decreased by 20 so thats why option E is the correct answer.

similarly on the second example option A is the correct ans by same logic.

when people do not know whether they won or lost they are going to compare the possible outcomes with the zero point and in the case gamble is not that much attractive