Alright, here are two problems for y'all to think about. Post answers to both and I'll post the solution in a few days. 1. Prospect theory Kahneman and Tversky presented groups of subjects with a number of problems. One group of subjects was presented with this problem. 1. In addition to whatever you own, you have been given $1,000. You are now asked to choose between: A. A sure gain of $500 B. A 50% change to gain $1,000 and a 50% chance to gain nothing. Another group of subjects was presented with another problem. 2. In addition to whatever you own, you have been given $2,000. You are now asked to choose between: A. A sure loss of $500 B. A 50% chance to lose $1,000 and a 50% chance to lose nothing. Mark

Ok i'll be first sucker.... From what I can see the best and worst outcomes of 1a and 2a are identical and also for 2a and 2b. That being, 1a and 2a - Best outcome is $1500.00. Worst outcome is $1500.00. 2a and 2b - Best outcome is $2000.00. Worst outcome is $1000.00. So, based on that 2a and 2b are a risk of $500.00 for a possible gain of $500.00.

Hmmm... Aren't they exactly the same. i.e. In each one, if you choose option A you end up with $1,500. This is the risk nothing option, the "sure thing". If you choose option B then you have a 50/50 chance of ending up with either $1,000 or $2,000 depending on the toss of the coin. These outcomes are $500 either side of the sure thing position of $1,500 so whether you "play" or not is not dependent on any statistical bias for or against you. Cheers, Michael.

No no, maybe people are misunderstanding. What you're supposed to do is choose either a. or b. in both scenarios. Mark

I only like risk when it is commensurate with the returns. I don't necessarily like risk for the sake of risk. Show me a risk where I have a fairly good chance of getting a positive return though, and I'll be in and in big! This example was 50/50 each way so I'll just take the bird in the hand and look for something with a weighting in my favour. Cheers, Michael.

I think the purpose of the above experiment was to show that, although the same deal, people are more risk averse when it comes to a possible loss rather than a gain. So to express the identical situation as a loss should become a less popular choice - something along those lines I think. Was this correct Mark?