1a)

1nov.2020 you bought apple stock for $165

1dec.2020 the price is $120 (reduced by $45)

Assume further that in another month there are two possible outcome:

Either the price drops again, with new 45 dollar (50% outcome).

Or the price increase with 45 dollar (50% outcome).

You are wondering whether to realize the stock today (December 1), or wait for one month more. Assume that your value function and decision weight function is as shown below, and that you use the purchase price of 165 as your reference point. Show what you want to choose to do.

v(x) = x^0,5for x>0

-(-x)^0,5for x<0 >

(p) = p

1b)

What is the disposition effect, and is your behavior in 1a) consistent with the disposition effect? Explain why / why not.

c)

1nov.2020 you bought apple stock for $165

1dec.2020 the price is $2100 (increased by $45)

Assume further that in another month there are two possible outcome:

Either the price increase again, with new 45 dollar (50% outcome).

Or the price drops with 45 dollar (50% outcome).

You are wondering whether to realize the stock today (December 1), or wait for one month more. Assume that your value function and decision weight function is same as 1a), and that you use the purchase price of 165 as your reference point. Show what you want to choose to do.

d) Explain how we empirically can measure the disposition effect?