TwoCitiesCapital Posted January 21, 2014 Share Posted January 21, 2014 Hi guys, I'm studying for the CFA Level 3 exam again and am thinKing about loss aversion and framing biases. An investor is prompted with a scenario with where he can choose a 1 in 4 chance of receiving $400 or $75 guaranteed. Now I know the math. I know that the first has a higher expected value and that generally its considered an irrational bias to choose the $75 as many participants do. My question is on your opinions. In certain circumstances, like this one, it seems that the irrational choice is my preference despite being aware of the "bias". My reasoning is below: 1) this is a one time event and there's no guarantee I'll play continuously 2) in a one time event scenario, there's a 75% chance of me losing with a 25% chance of winning big OR a 100% of me winning a little. So I have two questions for you: 1) which scenario would you choose and why? 2) in your selected scenario, what would the alternative reward have to be to make you switch your choice (cetiris paribus) Link to comment Share on other sites More sharing options...
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