Question

Suppose that Mobeen is loss averse. In morning Mobeen’s stock broker calls to tell him that he has
gained 300,000 on stock portfolio. In evening his accountant inform that he owes 300,000 taxes. In
the end, how he would be feeling emotionally as his gain exactly offset amount of extra taxes to
pay. Please explain with reference to consumer behavior?

Answer 1

risk averse is a person who is ready to earn least profit but wants to protect their capital.this means when a person is agree to take a little return over the investment but is not ready to risk the capital and its value the nature of the person is considered as risk averse,

in the given scenario if the gain would be equal to the amount of taxation then the ultimate feeling of mobeen would be satisfactory,

reason-

• after taking the risk,mobeen protected his capital and further he was able to pay off the tax without spending a single penny from his own pocket.in this way, even this is true he has nothing left in his hand after the dealing,but he would be feeling satisfactory with the deal.
• as per consumer theory the risk averse will go with the known and possible,predicted risk and lower return rather then unknown/unexpected dealing with highly expectation of profit.