Utility

Question 1

Subjective utility

Answer 1

Expected utility (whats it worth for me) rather than expected value (what its worth in general) this is the Descriptive approach. Context related

Question 2

Diminishing marginal utility

Answer 2

Phenomenon in which the significance of an increase in value is inversely proportional to what someone currently has (the more you have the more you need)

Question 3

Prospect theory

Answer 3

Predicts that people will, rather than should choose. Predicts pattern of risk aversive and risk seeking behavior and estimates subjective utility. Based on 2 assumptions

Question 4

Reference dependence

Answer 4

Expected gains and losses are relative to a person’s current state. People want to avoid losses more than seek gains

Question 5

Probability weighing

Answer 5

P are perceived with subjectivity. Very biased.

Question 6

Direct consequence of prospect theory

Answer 6

Endowment effect. Asking for higher price than they’re willing to pay in order to buy.

• selling feels like losing
• Buying feels like winning
• Loss digs deeper than winning