Question

Which of the following statements regarding prospecting theory is true? Explain why each statement is correct or incorrect.

a. Certainty is given low weight relative to near-certainty.
b. Prospect theory weights are exactly the same as the probabilities used in Expected Utility Theory.
c. The weighting function for losses can differ from the weighting function for gains.
d. A gains adds more to utility than an equal-sized loss subtracts from it.

Answer 1

Solution :-

The Correct Answer is Option C that is " The weighting function for losses can differ from the weighting function for gains. "

All other options are incorrect

Option (A) is incorrect As Certainty is not given low weight relative to near-certainty even it given more weight . Low-probability outcomes are given relatively higher weights and certainty is weighted highly relative to near certainty .

Option (B) is incorrect as Prospect Utility assumes that these weights do not always correspond to probabilities . While Expected Utility Theory assumes 50% chance of winning exactly

Option (C ) is Correct Because The weighting function for losses can differ from the weighting function for gains. Because the gain in utility related to any incremental gain in wealth is lower than the loss in utility

Option (D) is incorrect Because A gains adds less to utility than an equal-sized loss subtracts from it

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