Preferences January 22, 2010
Posted by admin in : Business , trackbackHere’s a situation.
I give you $300 with the following options:
a) Give you $100 dollar more
b) toss a coin and give you $200 more if you won and nothing if you lose
It was found that most preferred option a.
Here’s a little change
I give you $500 with the following options:
c) you need to give me back $100
d) toss a coin and pay $200 if you lost but nothing if you win
Now the option d was a more preferred one.
But from the probabilistic theory all these four choices are identical. They all have the expected value of $400. Then why do we have such strong preferences?
Because we are more willing to gamble when it comes to losses but are risk averse when it comes to gains.
Comments»
interesting!… i likes
btw did you come up with this??!