In an experiment run by researchers recently, subjects were randomly given either a mug or a pen, and were told that they owned the item they were given and could take it home at the end of the experiment. Approximately half the subjects (Group 1) were told that they would have a 90% probability of being able to exchange their object for the other one at the end of the experiment, and the rest (Group 2) were told that they would have a 10% chance of being able to exchange their object. Then, subjects filled out a time-consuming survey, the content of which is unimportant for this question. Finally, subjects were asked whether they want to exchange if given the chance.
(a) In a neoclassical model (with no reference dependence), approximately what percentage of subjects should want to exchange in each group?
(b) In a prospect-theory model with the reference point being the status quo, in which group should a larger percentage of subjects want to exchange?
(c) In Group 1, 56.4% wanted to exchange, while in Group 2, 22.7% wanted to do so. Explain this difference using prospect theory.
(d) To determine whether a subject would belong to Group 1 or Group2, researchers flipped a coin with sides "9" and "1" in front of the subjects. If the coin came up 9, the subject went into Group 1, and if the coin came up 1, the subject went into Group 2. Why do you think researchers performed the randomization into groups so conspicuously in front of subjects, rather than doing it on a computer and simply telling each subject his or her probability of exchange?