Question

Does the weighting function in the prospect theory magnify the importance of very low and very high probabilities? Why and how?

Prospect Theory offers an alternative framework to making decisions by expected utility maximization. It allows for these realistic behaviors exhibited by investors:
I) Having better prospects if seen next to an irrelevant, slightly flawed, alternative

II) Measuring success with respect to an (arbitrary) reference point

III) Loss aversion

IV) Tolerance for ambiguity when faced with the prospect of extraordinary gains

V) Stronger reactions to losses than to gains of the same magnitude

a. II, III and V

b. I and IV

c. I and II

d. III, IV and V

e. II and V

Answer 1

ANS:- d

Option I :- Prospect theory does not based on conclusion and on alternative in decision making when it comes to very low or very high gain or losses as per the weighing function.

Option:- Again decision making in mesuring success wont be allowed on person whim or random choice as per the prospect theory