According to prospect theory,
A) people are concerned with wealth levels only.
B) people are concerned with changes in wealth levels only.
C) people never use a reference level when making their decisions.
D) everybody is risk-neutral.

Question

Quizplus · Accepted Answer

According to prospect theory, people are more concerned with changes in wealth levels (gains or losses) rather than the actual wealth levels themselves. This is because people typically view losses as more painful than equivalent gains are pleasurable, a phenomenon known as loss aversion. Additionally, prospect theory suggests that people use a reference point or reference level when evaluating whether an outcome is a gain or a loss, which can impact their decision-making. Finally, prospect theory acknowledges that people are not necessarily risk-neutral, but instead may exhibit risk aversion or risk-seeking behavior depending on the context.

According to Prospect Theory