Prospect theory

What will you prefer?

  1. Get ₹50 definitely

  2. Option to get ₹100 or nothing with the toss of a coin (p=0.05).

  1. Lose ₹50 definitely

  2. Option to lose ₹100 or nothing with the toss of a coin (p=0.05).

If you choose 1 for both §1 and §2, you are a risk avert-er

If you choose 2 for both §1 and §2, you are a risk taker

If you don’t have any preference, you are risk neutral

In general, if we have something to lose, we generally prefer small definite gain over a risky bet. But if we are already in a losing position, we tend to take more risk.

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