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NISM Certifications · NISM-Series-X-B: Investment Adviser (Level 2) · Basics of Behavioural Finance

According to prospect theory, the value function of an investor is typically:

Prospect theory describes a value function that is concave for gains, convex for losses and steeper on the loss side. This reflects risk aversion in gains, risk seeking in losses and the stronger pain of losses compared with equal gains.

  1. AConcave for gains and convex for losses, steeper for lossesCorrect
  2. BLinear for both gains and losses
  3. CConvex for gains and concave for losses, steeper for gains
  4. DConcave for both gains and losses, equally steep

Explanation

Prospect theory (Kahneman and Tversky) says people are risk averse in gains (concave) and risk seeking in losses (convex), with a steeper curve for losses because losses hurt more than equal gains please. Other options reverse or flatten this shape.

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