Question

In the algebraic version of prospect theory, the variable x represents gains and losses. A positive value for x is a gain, a negative value for x is a loss, and a zero value for x represents remaining at the status quo. The so-called value function, v(x), has separate equations for translating gains and losses into, respectively, positive values (utility) and negative values (disutility). The gain or loss is typically measured in dollars while the resulting value (utility or disutility) is measured in utils. A typical person values gains (x > 0) using the function v(x) = x^0.88 and losses (x < 0) using the function v(x) = − 2.5*(– x)^0.88. In addition, if she stays at the status quo (x = 0), then v(x) = 0. Calculate the typical person’s value functions for gains and losses to fill out the missing spaces in the table below. Then answer the questions that follow.

Hi, I need help with section E

Answer 1

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