ECO331H1 Lecture Notes - Lecture 5: Marginal Utility, Prospect Theory, Loss Aversion
Document Summary
Keep whatever is in pot when first tail appears. However, most people have some x where they will choose a because of diminishing marginal utility. Expected monetary value does not equal expected utility. If g is strictly preferred to g" and g" is strictly preferred to g"", then g must be strictly preferred to g"" Upper and lower contour sets of a preference relation over lotteries are closed. If indifferent between aj and aj", then indifferent between two lotteries offering them with same probability as long as lotteries otherwise the same. If we change nothing but the common consequence in both lotteries, preferences should not change. If axioms 1-5 hold, then utility function exists and satisfies expected utility property. Implication: we prefer with certainty over gamble with expected value equal to. Being loss averse is consistent with expected utility theory.
