1. One of the most important concepts in behavioral finance is known as loss aversion -- many people will work harder to avoid a large loss than to earn a large gain. As well, empirical researchers have repeatedly shown that many people tend to believe rare but tragic outcomes (e.g., airplane crash, hurricane damage, terrorist event) are much more likely than actual experience suggests. Consequently, people tend to assess and manage risks in ways that are different from the predictions of rational decision theory.

   Without mentioning names, do you know people who tend to over-react to potential losses or rare events? Does this behavior indicate that the people are flawed decision makers, or does this situation indicate a flaw in the decision theory?