An individual has preferences consistent with prospect theory. The person takes their current wealth of $10,000 (plus any certain additions) as their reference point. Gains above this reference point are worth +1 util. Losses below this reference point are worth -2 utils. The person is faced with two choice problems. The first involves a choice between (A) no gamble and (B) a gamble with an equal
chance of winning $1,800 and losing $1,000 . The second choice problem, the person first has $1,000 taken away (resulting in the adjustment of the reference point). The choice is then between (C) being given back $1,000 for sure and (D) an equal chance of winning $2,800 or nothing. What choices would the person make?
a. A and C.
b. A and D.
c. B and C.
d. B and D.
b
Economics
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