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Prospect Theory/Decision Analysis: 3 You are given a choice between lottery 1 and lottery 2. You are also given a choice between lottery 3 and
Prospect Theory/Decision Analysis:
3 You are given a choice between lottery 1 and lottery 2. You are also given a choice between lottery 3 and lottery 4. Lottery 1: A sure gain of $240 Lottery 2: 25% chance to gain $1,000 and 75% chance to gain nothing Lottery 3: A sure loss of $750 Lottery 4: A 75% chance to lose $1,000 and a 25% chance of losing nothing 84% of all people prefer lottery 1 over lottery 2, and 87% choose lottery 4 over lottery 3. a Explain why the choice of lottery 1 over lottery 2 and lottery 4 over lottery 3 contradicts expected utility max- imization. (Hint: Compare lottery 1 + lottery 4 to lottery 2 + lottery 3.) b Can you explain this anomalous behaviorStep by Step Solution
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