Question

Gloria and Tran are both having bad weeks.

Gloria forgot to save her work and had to redo her essay, a pain that she values at about $30, and also the professor told her the essay was bad, a pain she values at $60.

Tran skinned his knee while walking his dog, a pain he values at about $30, and also his sister got a fever and he had to care for her, a pain he values at $60.

Assume both of them have the same prospect theory value function. Keeping mental accounting in mind, which of them is likely feeling worse right now?

Select one:

a. Tran

b. They're equal

c. Gloria

d. No way to tell

Draw a graph to support your answer

Answer 1

Option B

The prospect theory value function suggests that the human mind considers the actual gains equal to or less in terms subjective terms. However, according to the same theory the mind places greater value in subjective terms on losses than the actual value.
If both are having same prospect theory value function then they both are feeling equal subjective loss.

Mental accounting is the theory in behavioral economics which states that the different person have different perspective about the value of money and so they view benefits and losses differently.

It should be noted that Tran has placed value of -$60 for taking care of his ill sister but psychologically such activities tend to generate a satisfaction. This is because to take care of loving ones and being loved by others has tremendous positive effect on human behavior and mind.

Gloria will be in worse situation in that case because redoing any work increases pain but negative remarks about the efforts increases that exponentially.