Considering: Answer: What is the risk attitude in the domain of losses? ...
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What is the risk attitude in the domain of losses?
= Example: Suppose that a decision maker who uses PT faces the prospect L (0,12; y, p), where y > 0. Let the utility function be given by v(y) Vy and let the weighting function be the Prelec function, w(p) = e-Bl In p), with a = = 0.5, B = 1. = Hence, V(L) = [1 w(p)]Vo+w()y=w( py The expected value of the lottery is EL = py. The certainty equivalent of the lottery, Cl, can be calculated as follows: w(p)Vy= VC = C1 = yw(p) 2 The decision maker is risk loving if Cl > EL and risk averse if Cl 0. Let the utility function be given by v(y) Vy and let the weighting function be the Prelec function, w(p) = e-Bl In p), with a = = 0.5, B = 1. = Hence, V(L) = [1 w(p)]Vo+w()y=w( py The expected value of the lottery is EL = py. The certainty equivalent of the lottery, Cl, can be calculated as follows: w(p)Vy= VC = C1 = yw(p) 2 The decision maker is risk loving if Cl > EL and risk averse if Cl
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