Prospect theory, emotions, neurosciences and uncertainty

Question 1

Endowment effect

Answer 1

Because of availability of thoughts:

• Selling - Things of usefulness of object
• Buying - Thinks of monetary value of object (and alternative uses for that money)

Question 2

Query theory

Answer 2

Thoughts of consumer are influenced by internal and external queries

Question 3

Emotion appraisal theory

Answer 3

When sad you can’t to change situation so you buy shit.

When disgusted you want to expel stuff so you sell them.

Question 4

Myopic loss aversion

Answer 4

1. People over-invest in stable instruments (bonds) and under-invest in unstable instruments (stocks)
2. Every rise feels good but every lost hurts more
3. If reports are infrequent, people don’t mind to invest in unstable instruments

Question 5

Reflection effect

Answer 5

Risk-aversive for losses but risk-seeking for gains

Question 6

Bracketing

Answer 6

1. Narrow bracketing - People are isolating decisions
2. Broad bracketing - Outcomes are mingled with other gains and losses and that dilutes the psychological influence of any single outcome

Question 7

Equity premium

Answer 7

People ask for a premium too high to invest in stocks - Loss-aversion

Question 8

Disposition effect

Answer 8

Hold losing stocks too long and winning stocks too early - Reflection effect

Question 9

Downward-sloping labor supply

Answer 9

NYC cab drivers - Loss-aversion

Question 10

Assymetric price elasticities

Answer 10

Purchase is more sensitive to price increases than decreases - Loss-aversion

Question 11

Status quo bias

Answer 11

Due to loss-aversion

Question 12

Favourite-longshot bias

Answer 12

Favourites are underbet and longshots are overbet - Overweight of low Pr(loss)

Question 13

End-of-day effect

Answer 13

Reflection effect

Question 14

Buying insurance

Answer 14

Overweight low Pr(loss)

Question 15

Play lotto

Answer 15

Overweight low Pr(win)