Stock market investments are inherently risky. Suppose that Sasha is heavily invested in a high-tech firm with a positive earnings outlook. Then reports come out that the firm's primary technology is under a legal challenge from a competitor. If they should successfully repel the legal challenge, they will make the spectacular profits that everyone had been expecting, creating the expected returns on investment. If they fail, their business model will be irreparably broken and their stock will be worthless. Legal experts give the legal challenge a 60 percent chance of being successful. In the meantime, stock prices have plummeted in response to the news. Sasha previously had $1 million invested, and it is now worth only $400,000. What does prospect theory have to say about Sasha's likely reaction to the news and devaluation of the stock? What has happened to the level of risk? What is Sasha's likely reference point? Describe the change in risk aversion. Is Sasha likely to sell out now or hold the stock? Why? How might this explain behavior in a stock market crash?