Question

According to prospect theory, loss aversion may occur because people tend to...

1) value low probabilities
2) value mid-high probabilities
3) value gains more than losses

Answer 1

Loss aversion occurs because people tend to value losses more than gains. This has implications for investing in the stock market. The correct option is 1) value low probabilities

Step-by-step explanation:

Loss aversion, according to prospect theory, occurs because people tend to value losses more than gains. This means that a $1 loss would have a greater negative impact on our emotions than a $1 gain would have on our positive emotions.

Behavioral economists, Daniel Kahneman and Amos Tversky, conducted research that showed people feel negative emotions, such as anger or frustration, when they experience a loss, even if they also experience a gain at the same time. This insight has implications for investing, as people tend to react more strongly to losses than to gains in the stock market. The correct option is 1) value low probabilities