Task: According to prospect theory, which is preferred?
1. Prospect A or B
Decision (i) Choose between
A. (.80, $50, $0)
B. (.4, $100, $0)
2. Prospect C or D?
Decision (ii) Choose between:
C. (.00002, $500,000, $0) and
D. (.00001, $1,000,000, $0)
3. Are these choices consistent with expected utility theory? Why or why not?
Rex is a smart fellow. He gets an A in a course 80% of the time. Still, he likes his leisure, only studying for the final exam in half of the courses he takes. Nevertheless, when he does study, he is almost sure (95% likely) to get an A. Assuming he got an A, how likely is it he studied? If someone estimates the above to be 75%, what error are they committing? Explain.