An investor considers two mutual funds. Based on past experience, the first fund has expected return of 0.08 and standard deviation of 0.05. The second fund has expected return of 0.07 and standard deviation of 0.06. There is no reason to assume that future performance of these funds will differ from past performance. However, the second fund has a guarantee attached that return in any year will not be negative.

The investor buys the second fund. Use prospect theory to explain why.