Question

Suppose a person lost $16 and won $17 in the same day. What will be the net loss perceived by the person, according to behavioral economics? Assume that a $1 loss pains us 2.25 times more than a $1 gain helps. Enter your answer as a positive number in the box below and round to two decimal places if necessary.

Answer 1

The perceived net loss is $19, reflective of the behavioral economic principle of loss aversion, where a $1 loss is felt 2.25 times more than a $1 gain.

Step-by-step explanation:

According to behavioral economics, the perception of losses and gains is influenced by loss aversion. If a person lost $16 and won $17, we have to calculate the relative impact of both using the given ratio of loss aversion. The pain associated with the loss is 16 × 2.25, which equals 36. The gain provides a benefit of 17. Using the loss aversion ratio, we find that the net loss perceived is 36 - 17, which equals 19. Therefore, the net loss perceived by the person will be $19.