Asked by Baylee Grace on May 05, 2024
Verified
Josh will receive a salary of $300,000 next year.According to prospect theory:
A) Josh will be happy with that amount regardless of what he has made in the past.
B) Josh will only be happy with that salary if everyone else around him makes less than he does.
C) Josh will only be happy with that salary if his cost of living has not increased.
D) Josh's satisfaction with that salary depends on how much he made in the past.
Prospect Theory
A behavioral economics theory of preferences having three main features: (1) people evaluate options on the basis of whether they generate gains or losses relative to the status quo; (2) gains are subject to diminishing marginal utility, while losses are subject to diminishing marginal disutility; and (3) people are prone to loss aversion.
Salary
A form of payment from an employer to an employee, which may be specified in an employment contract.
- Explain the concept of prospect theory and its implications for individual decision-making.
Verified Answer
GS
Gavin SuttonMay 11, 2024
Final Answer :
D
Explanation :
According to prospect theory, satisfaction with outcomes depends on the individual's reference point, or what they have experienced in the past. Therefore, Josh's satisfaction with his $300,000 salary will depend on what he has earned in the past.
Learning Objectives
- Explain the concept of prospect theory and its implications for individual decision-making.