Prospect theory can explain why
A) people tend to gamble on long odds with small expected utility.
B) people tend to sell their losing stocks and keep their winning stocks.
C) people should only sell their losing stocks.
D) people should never play the lottery.

Question

Quizplus · Accepted Answer

Prospect theory proposes that individuals tend to be risk-averse when it comes to gains and risk-seeking when it comes to losses. Thus, people tend to sell their losing stocks quickly to avoid further losses while keeping their winning stocks in the hopes that they will continue to increase in value. This is known as the disposition effect.

Prospect Theory Can Explain Why