Please answer the following question.

Inertia vs. Action who feels worse? Kahneman and Tverskv (1932) ~ Paul owns shares in Company A. During the past year, he has considered switching to stoek In company a, but he decided against it, He now nnos he would have been better off by 51200 If he had switched to the stock or company a - George owns shares In company 3. During the past year he switched to stock in company A. He now nds that he would have been better of! by 51200 if he had kept his stock in tompanyB Status Quo Bias in Action 0 Most TV and App (e.g., TikTok) programmers use it to glide you from one show to the next 0 you move seamlessly from the end of one show to a quick intro to the next without even pausing for a commercial break - Because once they start, many people will continue to watch even though switching to something else is easy Status Quo Bias in Action - In blind taste tests, consumers prefer new Coke over the original and Pepsi ' After being flooded with phone calls, 40,000 letters, and reams of bad press, the company backtracked three months later, announcing the return of Coca-Cola "classic" Inertia vs. Action who feels worse? Kahneman and Tversky (1932) - Paul owns shares in Company A. During the past year, he has eonsioereo switching to stock in company a, but he decided against it, He now nds he would have been better off by 51200 Ir he had swltched to the stock or companv B George owns shares In company 5. During the past year he switched to stock in company A. He now nds that he would have been better of! by suoo it he had kept his stock in company a Status Quo Bias in Action - Signing up for an Choose l Plan automatically a..- renfiing service (free 'lz T Z: I; tria s - Default: the relatively :33: .151"; 3.2!: 3am; expensive one was. - Netix spins this as a 4.: benet: "lfyou are '53:: .::'.'.:'w .::'..'...'n .2121?" enjoying Netflix, do a\" 30" us" n... nothing and your membership will automatically El continues." w"- Avoiding Actions and Changes - We are biased to keep things the way they are - Even if we didn't originally choose it ' We are biased to avoid risks generated by change - Even when the risks are less than from making no change Status Quo Bias - People's tendency of "doing nothing or maintaining one's current or previous decision" Samuelson and Zeckhauser (1988) Status Quo Bias in Action ' A: new hires utinruenuwtionnem need to sign up M for the savings \" 35% plan wlth little ~~ paperwork - B: new hires are "' 49% automatically ... enrolled into the savings plan unless they overrode that ,. decision Group A Group B Endowment Effect: Kohneman, Knetsch, and Tholer (1990) - A decorated mug (worth $5) 0 Recipients of a mug (sellers) are told: Now, you own the object in your possession. You have the option of selling it if a price, which will be determined later, is acceptable to you. For each of the possible prices, indicate whether you wish to - sell your object and receive the price - keep your object - The subjects indicated their decision for prices ranging from $0.50 to $9.50 in steps of 50 cents 3. Draw indifference curves for the following loss aversion model with the reference point being (2, 2): 00,2)(531: $2) = \"1(31 T1) + 192(32 T2): in which 2 'f > 1' m 41) = r) then gain in dimension 1 . x = (X1, X2): a consumption bundle . If x1 0 . Linear value . Let's consider an example to illustrate that CLA can =M1(x1-1), otherwise function Vi accommodate both the endowment effect and the status quo bias Strict loss . V2 (X2-12)= (x2-12), if X2- 2>0 aversion Assume that the loss aversion coefficient is 2, and =A2(X2-2), otherwise Losses Gains value functions for both dimensions are identical . No if x20 . Loss aversion coefficient );21 diminishing V, (x)= sensitivity 2x if xUM(C)=-1 =1+2*(-1)=-1 and people prefer mug to candy when they endow with people prefer mug to candy when they are endowed Uc(C)=U(0,1)(0,1)=VM(0-0)+Vc(1-1) mug with the mug =0+0=0 0=UM(M)>UM(C)=-1 Without a Reference Point Things to Remember r=(0,0): "no" reference point . There is a different utility function for each U(M)=U(0,0)(1,0)=VM(1-0)+vc(0-0) reference point =1+0=1 . Gains and losses are defined relative to a reference point and The value function is steeper in the negative than in U (C)=U(0,0)(0,1)=VM(0-0)+Vc(1-0) the positive domain (losses loom larger than =0+1=1 corresponding gains) The marginal value of both gains and losses Therefore, U(M)=U(C) if there is no reference point. decreases with their size