Respondents are given the following choices:
1) Choose between Gamble A: Win $4000 with probability 0.8 or Gamble B: Win $3000 for sure.
2) Choose between Gamble C: Lose $4000 with probability 0.8 or Gamble D: Lose $3000 for sure.
80% of respondents choose Gamble B over Gamble A; i.e. they prefer to win $3000 for sure over $3200 in expectation. But 92% of those same respondents chose Gamble C over Gamble D; i.e., they prefer to lose $3200 in expectation than lose $3000 for sure.
A potential explanation of this pattern of choices is that:
A) People are risk seeking in losses but risk averse in gains.
B) People are risk seeking in gains but risk averse in losses.
C) People are risk neutral in losses but risk averse in gains.
D) People evaluate gambles from a reference point and here the reference point is not clear, leading to inconsistent choices.

Question

Quizplus · Accepted Answer

A potential explanation for the observed pattern of choices is that people tend to be risk-seeking when facing potential losses (preferring to gamble to avoid a certain loss) and risk-averse when facing potential gains (preferring a certain gain over a gamble with higher expected value). This behavior is consistent with prospect theory, which suggests that losses and gains are valued differently, and people are more sensitive to losses than to gains.

Respondents Are Given the Following Choices