Question
Alex and Ben have value function v(x)=x/3 for gains and v(x)=3x for losses. For all the following questions, imagine that Alex and Ben own stock
Alex and Ben have value function v(x)=x/3 for gains and v(x)=3x for losses. For all the following questions, imagine that Alex and Ben own stock in the same company. When they bought the stock, it was worth $15. It later rose to $21, but then dropped to $12.
(a) Alex uses the original price ($15) as his reference point. If you ask him, how much would he say that he lost (in terms of value) when the price dropped from $21 to $12? (b) Ben uses the peak price ($21) as his reference point. If you ask him, how much would he say that he lost (in terms of value) when the price dropped from $21 to $12? (c) Who is more disappointed when the price drops, Alex or Ben?
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