Essays on Risk Averse Nature of Preferences Assignment

Download full paperFile format: .doc, available for editing

The paper "Risk Averse Nature of Preferences " is an outstanding example of a finance and accounting assignment. According to the results of the problem, it is clear that 84% of the respondents chose to receive 240 now instead of a 25% probability of receiving $1000 now. From the decision of the investors, it is evident that gains rather than losses have been the reference basis for the decisions of the investors. Instead of gambling for a 25% chance of receiving $1000 now, investors opted for the sure bet of receiving $240 now regardless of the fact that the former has the potential of yielding greater returns in the event that it occurs.

In the case of the second decision, it is clear that majority of the investors (87%) chose 75% chance of losing $1000 now as compared to the sure bet of losing $50 now. In explaining the two problems and solutions selected by the investors, it would be proper to take into consideration the fact that the investors had an underlying state of affairs where there is the potential of receiving $1000 now.

In order to look at the outcomes of their decisions, it is proper to look at two possible gains as well as the reference state (Kahneman & Tversky, 1984). The risk-averse nature of preferences provides a viable explanation to the decision of the investors to opt for the sure bet of $240 now as compared to the 25% chance of receiving $1000 now. A review of the second case reveals a reference state where there is a chance of not losing anything from the available options. As shown in the second case, one should choose between the sure bet of losing $750 now or the 25% probability of losing $1000 now.

Investors opted for the second decision since it gave an allowance of not incurring loss at all. According to Kahneman & Tversky, the best decision in such a case would be the decision that has the potential of maintaining the reference state or the status quo where the investor does not lose anything. As a result, the investors in the second case revealed a risk-seeking preference for the gamble as opposed to the sure stake of losing $750 now. Problem 2 In the second problem, it is still evident that investors made a risk-averse preference of choosing the sure gain of $100 as compared to the positive gamble of earning $200 with a probability of 0.5.

At the same time as revealed in the second case, investors indicated a risk-seeking preference when the majority opted for the sure loss of $100 now as compared to the 50% chance of losing $200 now. The consideration of the financial outcomes as states of wealth rather than potential gains and losses explain the differences noted in the decisions adopted by the investors in both problems.

For instance, the investor is already $300 richer now of making the decision. The investor should make a decision that would guarantee a cumulative gain or a comparatively lower loss in an attempt to maintain the status quo. This explains the reason why the majority of the investors opted for the sure gain of $100 now that would raise their status quo to $400 as compared to the alternative option that presented the chance of reducing preventing them from seeing any gain at all.

The same decision applies to the second case where the majority of the investors considered the option of the sure loss of $100 that would reduce their state of wealth to $400 instead of the alternative option that presented the chance of reducing their wealth status further to $300.

References

Beresford, B., & Sloper, P. (2008). Understanding the dynamics of decision-making and choice: A scoping study of key psychological theories to inform the design and analysis of the Panel Study. York: Social Policy Research Unit, University of York.

Diacon, P. E., & Calance, M. (2014). THE RELATIONSHIP BETWEEN BEHAVIOURAL AND NEOCLASSICAL ECONOMICS. CES Working Papers, 6(1), 71-76.

Gigerenzer, G., & Gaissmaier, W. (2011). Heuristic decision making. Annual review of psychology, 62, 451-482.

Kahneman, D., & Tversky, A. (1984). Choices, values, and frames. American psychologist, 39(4), 341.

Polič, M. (2009). Decision making: Between rationality and reality. Interdisciplinary Description of Complex Systems, 7(2), 78-89.

Zalega, T. (2014). Consumer and Consumer Behaviour in the Neoclassical and Behavioural Economic Approach. Konsumpcja i Rozwój, (4 (9)), 64-79.

Download full paperFile format: .doc, available for editing
Contact Us