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An Individual Has Preferences Consistent with Prospect Theory

question 3

Multiple Choice

An individual has preferences consistent with prospect theory. The person takes their current wealth of $10,000 (plus any certain additions) as their reference point. Gains above this reference point are worth +1 util. Losses below this reference point are worth -2 utils. The person is faced with two choice problems. The first involves a choice between (A) no gamble and (B) a gamble with an equal chance of winning $1,800 and losing $1,000. The second choice problem,the person first has $1,000 taken away (resulting in the adjustment of the reference point) . The choice is then between (C) being given back $1,000 for sure and (D) an equal chance of winning $2,800 or nothing. What choices would the person make?

Definitions:

Insanity

A legal term for individuals who are determined to be unable to understand the nature and quality of their actions due to mental illness, preventing them from being responsible for criminal acts.

Defendant's Intent

A legal concept referring to the intention behind a defendant's actions, often crucial in determining the outcome of criminal cases.

Main Problems

Main problems refer to the primary or most significant issues or challenges within a particular context or situation.

Legal Rules

Established codes of conduct that are authorized and enforced by a governing authority and that must be followed by the members of a society.