Match one of the terms from prospect theory to an example using the appropriate

Question

Match one of the terms from prospect theory to an example using the appropriate number. 1. status quo 4. loss aversion 2. endowment effect 5. framing effects 3. mental accounting 6. anchoring a. You always buy a warranty for every major consumer product you purchase regardless of whether a product is highly reliable or whether you can afford to take the loss if something should happen. __4____ b. You like the number 99. Whenever you see a product sold for $0.99, you will often buy it even if you have no practical or valid use for the product. ______ c. You buy some stock in a drug company, but then the price drops sharply because one of the major drugs it sells is found to have bad side effects. You think you should sell the stock but don’t want to lose money on what you purchased. __1____ d. You tend to judge your gains or losses relative to your current situation, which this is also called. ______ e. You go to the store and purchase a gas grill and get 5 percent off, and think you got a good deal. You then talk with your neighbor, who p6urchased the same gas grill and received 15 percent off, and think you did not get a good deal. ______ f. You buy a new device for $50 and start using it. Then you happen to meet a friend who sees your device and wants to buy it from you on the spot. You think about it and say fi ne, but state an asking price of $75. ______

Explanation / Answer

a. You always buy a warranty for every major consumer product you purchase regardless of whether a product is highly reliable or whether you can afford to take the loss if something should happen. Loss Aversion

b. You like the number 99. Whenever you see a product sold for $0.99, you will often buy it even if you have no practical or valid use for the product. Endowment Effect

c. You buy some stock in a drug company, but then the price drops sharply because one of the major drugs it sells is found to have bad side effects. You think you should sell the stock but don’t want to lose money on what you purchased. Status Quo

d. You tend to judge your gains or losses relative to your current situation, which this is also called. Framing Effect

e. You go to the store and purchase a gas grill and get 5 percent off, and think you got a good deal. You then talk with your neighbor, who purchased the same gas grill and received 15 percent off, and think you did not get a good deal. Anchoring

f. You buy a new device for $50 and start using it. Then you happen to meet a friend who sees your device and wants to buy it from you on the spot. You think about it and say fine, but state an asking price of $75. Mental Accounting

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