What is common ratio effect? How can probability weighting model common ratio effect?
Homework Answers
in general, when decisions maker needs to select between a sure monetary payoff and a two-outcome lottery which yileds higher outcomes with probability greater than one half, then the decision maker chooses sure monetary payoff with lower yield lower risk than lottery which is high yield high risk known as common ratio effect.
The probability weighted model now leads to equal weightage of probability and thus decisions maker can now also choose risky lottery with higher yields due to it and thus causes strong violation of expected utility theory.
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What is common ratio effect? How can probability weighting model
common ratio effect?
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