Chatgpt questions

Question 1

What is the key difference between Expected Utility Theory and Prospect Theory?

Answer 1

Expected Utility Theory assumes people make decisions rationally to maximize utility, while Prospect Theory considers psychological biases, such as loss aversion and probability weighting.

Question 2

What is loss aversion in Prospect Theory?

Answer 2

Loss aversion refers to the tendency for people to feel losses more intensely than gains of the same magnitude. The value function is steeper for losses than for gains.

Question 3

How does the probability weighting function in Prospect Theory distort objective probabilities?

Answer 3

It overweights small probabilities and underweights large probabilities, reflecting people’s tendencies to overestimate rare events and underestimate common ones.

Question 4

What is the representativeness heuristic?

Answer 4

A mental shortcut where people judge the probability of an event based on how similar it is to a prototype, often ignoring base rates.

Question 5

What is the anchoring effect?

Answer 5

A cognitive bias where people rely too heavily on an initial piece of information (the “anchor”) when making decisions.

Question 6

What is the endowment effect, and how does it relate to Prospect Theory?

Answer 6

The endowment effect is the tendency to value an item more once you own it, consistent with loss aversion in Prospect Theory.

Question 7

What is Bayes’ Theorem, and how is it used in decision-making?

Answer 7

Bayes’ Theorem calculates the probability of an event based on prior knowledge and new evidence. It helps update beliefs in light of new information.

Question 8

What is base rate neglect?

Answer 8

A bias where people ignore the base rate (general probability) of an event when presented with specific, vivid information.

Question 9

How does framing affect risk-taking behavior?

Answer 9

People are risk-averse for gains but risk-seeking for losses, depending on whether a situation is framed as a potential gain or loss.

Question 10

What is the Allais paradox, and what does it illustrate?

Answer 10

The Allais paradox shows that people’s preferences violate Expected Utility Theory, as they are influenced by certainty and probability distortions.

Question 11

How does Prospect Theory explain the preference for insurance?

Answer 11

People overweight small probabilities of large losses, making insurance appealing even if the expected value is negative.

Question 12

Why do investors monitor portfolios less frequently under Prospect Theory?

Answer 12

Frequent monitoring increases the perception of losses, which are felt more intensely due to loss aversion.

Question 13

What is the availability heuristic?

Answer 13

A bias where people judge the likelihood of an event based on how easily examples come to mind.

Question 14

What is overconfidence bias?

Answer 14

The tendency for people to overestimate their knowledge, abilities, or control over outcomes.

Question 15

What is the sunk cost fallacy?

Answer 15

A bias where people continue investing in a losing endeavor due to prior investments, even when it’s irrational to do so.

Question 16

What does the value function in Prospect Theory look like, and what are its key characteristics?

Answer 16

It is concave for gains, convex for losses, and steeper for losses, reflecting diminishing sensitivity and loss aversion.

Question 17

What is diminishing sensitivity in the value function?

Answer 17

The psychological impact of changes decreases as the magnitude of gains or losses increases (e.g., the difference between $10 and $20 feels larger than $1000 and $1010).

Question 18

Why do people overweight small probabilities in Prospect Theory?

Answer 18

Due to the probability weighting function, which magnifies the perceived likelihood of rare events.

Question 19

How does the certainty effect influence decision-making?

Answer 19

People give disproportionately high weight to outcomes that are certain, preferring guaranteed outcomes over probabilistic ones, even if the latter has a higher expected value.

Question 20

What is the reflection effect in Prospect Theory?

Answer 20

It describes how people are risk-averse for gains but risk-seeking for losses.

Question 21

What is hindsight bias?

Answer 21

The tendency to see past events as more predictable than they actually were.

Question 22

How does the conjunction fallacy arise?

Answer 22

When people judge a conjunction of two events (e.g., “Linda is a feminist and a bank teller”) as more probable than a single event, violating probability laws.

Question 23

What is confirmation bias?

Answer 23

The tendency to search for, interpret, and recall information that confirms pre-existing beliefs.

Question 24

How does the availability heuristic distort judgment?

Answer 24

It leads people to overestimate the likelihood of events that are vivid or recent in memory.

Question 25

What is the difference between framing and anchoring?

Answer 25

Framing affects how choices are presented (gain vs. loss), while anchoring biases decisions toward an initial reference point.

Question 26

Why do people tend to be risk-averse for gains?

Answer 26

Gains are valued less as they increase (diminishing sensitivity), making people prefer smaller, certain rewards.

Question 27

What is ambiguity aversion?

Answer 27

The preference for known risks over unknown risks, even when the expected outcomes are the same.

Question 28

How does the fourfold pattern of risk attitudes explain behavior in low and high probabilities?

Answer 28

People are risk-seeking for low-probability gains and high-probability losses but risk-averse for low-probability losses and high-probability gains.

Question 29

What is the role of regret in decision-making?

Answer 29

Anticipating regret influences choices, as people aim to avoid future feelings of regret, even if it leads to suboptimal decisions.

Question 30

How does Expected Utility Theory explain risk preferences?

Answer 30

It assumes people maximize the expected utility of outcomes, with utility diminishing as wealth increases.

Question 31

How does Prospect Theory explain why people buy lottery tickets?

Answer 31

People overweight the small probability of winning (probability weighting) and are drawn to the large potential gain.

Question 32

Why might people avoid selling losing stocks?

Answer 32

Due to the disposition effect, where they hold onto losses to avoid realizing them, consistent with loss aversion.

Question 33

How does framing affect medical decisions?

Answer 33

A treatment framed as "90% survival rate" is more appealing than "10% mortality rate," even though the outcomes are identical.

Question 34

Why do people overpay for extended warranties?

Answer 34

They overweight the small probability of product failure, consistent with probability weighting.

Question 35

How does mental accounting influence spending behavior?

Answer 35

People treat money differently based on its source or intended use (e.g., windfall gains vs. earned income).

Question 36

Write the formula for Bayes’ Theorem.

Answer 36

P(A∣B)= P(B∣A)⋅P(A) / P(B) ​

Question 37

What are the parameters in Prospect Theory's value function?

Answer 37

v(x)=x^𝛼 for gains, −𝜆 (−𝑥)^𝛽 for losses, where 𝛼,𝛽 capture diminishing sensitivity and 𝜆>1 represents loss aversion.

Question 38

How does the probability weighting function distort objective probabilities?

Answer 38

It overweights small probabilities and underweights large probabilities using: π(p)= p^γ / (p^γ+(1−p)^γ)^1/γ ​

Question 39

What does a concave utility function imply about risk preferences?

Answer 39

It indicates risk aversion, as the marginal utility of wealth decreases with increasing wealth.

Question 40

Calculate the expected utility for a gamble offering $100 with a 50% chance and $50 with a 50% chance. Assume 𝑢(𝑥)=√𝑥.

Answer 40

EU=0.5⋅√100+0.5⋅√50 =5+3.54=8.54.

Question 41

Is it ethical to use framing to influence decision-making in public policy? Why or why not?

Answer 41

It depends; framing can simplify complex information but may also manipulate choices, undermining autonomy.

Question 42

How does loss aversion explain the endowment effect?

Answer 42

Losses are felt more strongly than equivalent gains, so people demand more to give up an item than they would pay to acquire it.

Question 43

What is a sunk cost, and why is it irrational to consider it in decision-making?

Answer 43

A sunk cost is a past expense that cannot be recovered. Rational decisions should be based on future costs and benefits, not past expenditures.

Question 44

What is the significance of the Allais paradox?

Answer 44

It shows that real-world choices often violate the independence axiom of Expected Utility Theory, supporting Prospect Theory.

Question 45

Why might people fail to update their beliefs correctly using Bayes’ Theorem?

Answer 45

Due to base rate neglect or misjudging conditional probabilities.