behavioral economics

Question 1

When it comes to decision-making in prospect theory, there are two phases:

Answer 1

1) Editing
How are the choices presented, this involves framing, coding, combining, segregating, cancelling, simplifying

2) Evaluating
Value assigned is subjective
Probability is not the same as decision weights

Question 2

Explain what the four main assumptions are behind prospect theory and how
these compare to the assumptions in mainstream economics.

Answer 2

Outcomes are judged relative to a reference point, as gains or losses, not final
outcomes as would be the case in mainstream economics.
* Losses hurt more than gains satisfy whereas there would be no difference in
mainstream economics.
* Decision weights may differ from probabilities, whereas these would be the
same in mainstream economics.
* Both for gains and losses there are diminishing returns in value, similar to
diminishing marginal utility in mainstream microeconomics

Question 3

What is bayes rule formula?

Answer 3

P(A∣B)= P(A)⋅P(B∣A)/P(B)

Question 4

Endowment effect

Answer 4

Willingness to pay is lower than the willingness to accept for the same product
When you own something you value it more
Less prevalent among experienced traders

What explains this effect?
Losses hurt more than gains satisfy