2013 Question 3A

did anyone else put the disposition effect? I thought that was what they were looking for but it doesnt seem to be in the answer sheet?

It’s closly related. The disposition effect is a result of loss aversion where a person views gains/losses and reacts differently to each. The person becomes risk seeking in a loss position (make up loss) and risk averse in a gain position (sell gain) because losses hurt more than gains. They also underreact to high probablility events and overreact to low probability events. This leads to a utility fuction that is convex for losses and concave for gains.

SInce they want the shape of a utility funtion that is why you get the guidline answer. I’d give you like half credit cause you didn’t answer the question but you knew what you were talking about.