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5. There are 3 poker players, A, B, and C. They each have reference-dependent pref- erences over money m, with a reference point of r.
5. There are 3 poker players, A, B, and C. They each have reference-dependent pref- erences over money m, with a reference point of r. Letting x = m -r, their utility functions are as follows: r if x20 VA(T) = 2x if x 50 Va if r20 UB (T = V-x if x50 are if r20 vc(T) = -(-x) if x50Assume that player C has linear probability weights {that is1 she does not have prospect theory's nonlinear probabilityweighting function], then her expected utility of a fty 4 fty gamble of getting either or or m' is 1 1 Ecm r} + Engfm' 1*} Further assume the reference point of player C is r 2 ll, with or = [15 and d = {1.3. For parts d, e and f? answer: [i] for which value 5; would player 0 be indifferent between not betting and taking a ftyfty gamble to win $5; or lose $1? [ii] Does this reect risk loving or riskaverse behaviour? (iii) what feature of player C's referencedependent preferences is driving this behaviour? [d] [1|] points] Player G has not won or lost anything yet. {e} [1|] points] Player G is up 31!]. {f} [1|] points] Player G is down $1 {g} [5 points] Referring to parts d, c1 and f, when is Player G most risk averse? Explain the intuition
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