Question
Suppose there are two investors: Joe and Bob. Both have pension funds, into which they deposit money each month from their paychecks. Both are in
Suppose there are two investors: Joe and Bob. Both have pension funds, into which they deposit money each month from their paychecks. Both are in their early 30s, and anticipate retiring at around age 65. Neither anticipates withdrawing any money from his pension fund prior to retirement.
Joe watches his pension fund closely, looking each week at whether has gone up or down in value. On a week to week basis, the US equity markets are down almost as often as they are up. Bob, on the other hand, only checks the value of his pension fund once every five years or so. On a five-?year basis, the US equity markets are down less than 10% of the time.
Joes pension fund money is all in bonds, while Bobs is all in equities. Which single feature of Prospect Theory provides the best explanation for the two mens different portfolio allocations? Provide your reasoning.
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