Question

In contrast to expected utility​ theory, prospect​ theory: A. weights outcomes based on their true​ probabilities, while expected utility uses a subjective weighting function. B. assumes people only care about their level of wealth instead of expected utility. C. allows people to treat gains and losses asymmetrically. D. decision makers are more sensitive to a given change in the outcome for large gains or losses than for small ones.

Answer 1

Answer: C. allows people to treat gains and losses asymmetrically.

Step-by-step explanation:

According to the Prospect Theory, people generally are very averse to losses. For this reason they will always pick the option that gives them.gains as opposed to losses even if the result is the same. This means that they ascribe greater utility towards gains than losses meaning that they treat them asymptomatically.

For example, two options could be put to you. One makes you $10 and the other makes you $20 but you will lose $10. The result is the same but according to this theory you will pick the first option because gains are favoured to losses.

Expected Utility on the other hand involves people picking options and not knowing what the outcome will be so they cannot treat loss or gain asymmetrically. This is in contrast to the Prospect theory as because they know what might happen, they are able to pick gains.