2.Question 2What problems does prospect theory solve? (check all that apply)1 pointPeople can underestimate high probabilities and overestimate low probabilitiesPeople do not treat gambles as equivalent to their expected utilityPeople will make big gambles to avoid lossesPeople will often make purchases impulsively
Question
2.Question 2What problems does prospect theory solve? (check all that apply)1 pointPeople can underestimate high probabilities and overestimate low probabilitiesPeople do not treat gambles as equivalent to their expected utilityPeople will make big gambles to avoid lossesPeople will often make purchases impulsively
Solution
Prospect theory addresses several issues related to decision-making under risk and uncertainty. Let's analyze each option:
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People can underestimate high probabilities and overestimate low probabilities: This is correct. Prospect theory explains that people tend to distort probabilities, underestimating high probabilities and overestimating low probabilities, which affects their decision-making.
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People do not treat gambles as equivalent to their expected utility: This is also correct. Prospect theory suggests that people evaluate potential losses and gains differently, leading them to make decisions that deviate from the expected utility theory.
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People will make big gambles to avoid losses: This is correct as well. Prospect theory introduces the concept of loss aversion, where people are more likely to take risks to avoid losses than to achieve gains.
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People will often make purchases impulsively: This is not directly addressed by prospect theory. While prospect theory deals with decision-making under risk, impulsive purchases are more related to behavioral economics and consumer behavior.
Therefore, the correct answers are:
- People can underestimate high probabilities and overestimate low probabilities
- People do not treat gambles as equivalent to their expected utility
- People will make big gambles to avoid losses
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